UK: Politics to remain in the driving seat - Rabobank

In view of the analysts at Rabobank, while technical indicators will provide guidance for investors, they would expect politics to remain in the driving seat. 

Key Quotes

“Even though May looks set to secure a strong mandate from UK voters, the priority of EU negotiators heading into the Brexit talks remains the protection of the EU27.  The Brexit talks are still set to be tough and the result could still deal a blow to the UK economy.” 

“Yesterday the IMF revised up its forecast for UK 2017 growth to 2.0%, its second upward revision since the start of the year.  The news endorses the fact that the UK economy has held up better than many major forecasters had expected in the aftermath of last June’s Brexit referendum.  However, the IMF remained cautious on the UK growth outlook for next year as the Brexit impact materialises.  The most recent round of UK data releases has produced several downside surprises.  Higher inflation appears to be eating into consumers’ real income and retail sales have been trended lower since December.”

“House price indicators have also been stalling while the latest reading of official production data were surprising soft.  Despite higher inflation, we see no risk of a UK rate hike until at least mid-2018 and potentially into 2019.   Notwithstanding the risk that GBP could see a boost from an early resolution on the size of the Brexit bill or a deal about the rights of EU citizens, the Brexit talks have the potential to bring several negative surprises for GBP particularly around the issue of trade.  Combined with a dovish BoE position, we continue to see GBP as a vulnerable currency and subject to continued bouts of volatility.”