GBP: Decomposing weakness since August - ING

Analysts at ING attribute GBP's weakness since the August BoE meeting to a narrower focus on upcoming Brexit and domestic political risk events, as well as markets adjusting to a weaker UK economic outlook.

Key Quotes

“Both factors now look to be adequately priced into the currency; the relative cyclical and risk premium channels were the biggest contributors to GBP's pronounced weakness against the EUR earlier this summer.”

“However, with ECB QE speculation priced into the EUR and UK political risks unlikely to notch up another gear in the immediate future, we're now starting to see the overshoot in EUR/GBP unwind. We believe that a hawkish surprise at this week's BoE meeting could fuel a further correction towards - and potentially below - the 0.90 level. This would reinforce our broader view that a EUR/GBP move towards parity remains very much a longshot at this stage.”

“The bottom line is that while GBP had a fairly dismal August, we believe the combination of more robust UK inflation signals in the latest round of CPI and labour market data releases - as well as a hawkish tilt at the September BoE meeting - could mark a positive turning point in GBP sentiment. Our BoE scenario analysis shows that the extent of GBP's initial recovery this week will be a function of how much, if at all, short-term UK rates move higher. But in the absence of any further escalation in UK political risks, we look for GBP to embark on a broader corrective phase over the next couple of weeks.”