Sterling is resilient, but will continue to weaken in 2018
In the face of political uncertainty sterling is proving to be resilient. Jeremy Stretch, Head of G10 FX for CIBC discusses its performance and tells us that it has been oscillating north of 1.32, nearer 1.33. He is interested to see what the MPC policy makers are going to underline in their current testimonies. Some of the MPC members are very vocal in the need for additional action.
In the context for the political and macro-economic dynamics; there are still more headwinds than tailwinds for Sterling in the short term. Jeremy is looking at the upcoming EU leader summit in December; if there's not going to be any movement on trade and transitional deal, then Sterling is left very vulnerable. The UK government could get EU to discuss trade on the basis of financial obligations.
There is however a risk of the trade and transitional deal getting kicked into 2018. Overlaid with the German political risks, the UK is up against it. Sterling rallies are worth selling in to. The price is at the mercy of the scenario of a cliff edge exit. If we start to see that moving up the agenda, then we will see Sterling under perform. Jeremy believes that Sterling will continue to under perform against the dollar next year. We won't see capitulation back to 1.20. We are more likely going to see levels in the upper 1.20's.
It is better to play sterling weaknesses against the Euro than the Dollar. We can see EUR/GBP at 0.94 / 0.95 in the middle part of next year. If you are looking for risk of scenario's Jeremy suggests looking at GBPJPY. Good news for UK exporters, but the news has to be kept in context.
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