UK: Pound pessimism continues to ease supporting rebound - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound continues to rebound broadly alongside the strong US dollar as excessive pessimism continues to ease.

Key Quotes

“The OBR presented a relatively upbeat set of economic forecasts expecting only a modest slowdown in growth in the coming years although they could still prove too cautious. The OBR’s forecast for GDP growth of 1.4% in 2017 has been set above the current Bloomberg consensus forecast of 1.0%. The OBR estimated that the UK’s potential growth has been lowered by 2.4 percentage points over the forecast period due to Brexit although such precise figures should be taken with a pinch of salt given the high uncertainty.”

“In response to the projected near-term economic slowdown and structural deterioration in the public finances, the government has “opted for neither a large fiscal stimulus nor for more austerity over the medium-term. Instead the Chancellor has proposed a much looser fiscal mandate which gives him scope for almost 2.5% of GDP (GBP56 billion) more structural borrowing in 2020-21. Forecast revisions have absorbed 0.9% of GDP (GBP20 billion) of this extra room for manoeuvre and the Chancellor has given away 0.4% of GDP (GBP9.5 billion) mostly in infrastructure spending. This leaves 1.2% of GDP (GBP26.5 billion) left over in case the structural outlook is worse than expected or the Chancellor wants to announce more giveaways”. The overall impact on growth is expected to prove marginal adding 0.1 percentage point in 2017-2018. At the margin the developments support our outlook for the pound to continue to defy more pessimistic expectations.”