Just as I was beginning to think that the negative GBP sentiment which was already weakening investor attraction towards the GBP was unable to deteriorate any further, it further deteriorated. The GBPUSD just took another whack and slipped back down to 1.5076 following the Bank of England (BoE) minutes release unexpectedly announcing that the two dissenting members of the Monetary Policy Committee (MPC) had committed a complete U-turn and switched their votes back to “NO” against a UK interest rate rise. The reasoning behind the switching in votes is linked to the BoE’s ever-growing dovish views on inflation, nonetheless the switching in allegiance from the dissenting members has most likely swept away any remaining optimism that the BoE might have raised rates this year.
As a result, we are looking at the increasing prospects for the GBP to continue suffering from a lack of attraction for perhaps at least the first half of the current year. There are multiple different factors that are going to be weighing on investors’ minds right now, with each factor possibly making an investor even more reluctant to enter the GBP. For example, the common consensus is that UK inflation levels are going to continue weakening and possibly enter a short-term disinflation period before inflation rises again later on. There is also a UK General Election in a few months and after the complete whirlwind in political uncertainty with the Scottish Referendum last September, you would expect potential buyers would prefer to wait for any potential uncertainty to clear up before considering purchasing.
On top of disinflation worries and potential political concerns, there are clear indications out there that UK domestic momentum is slowing down. Although the UK economy remains the fastest growing in the advanced world and projected growth of 2.7% this year is nothing to roll your eyes at, investor awareness that the BoE have adopted a laissez-faire approach towards raising interest rates – and that prospects for a UK rate rise for the remainder of the year could just be wishful thinking – is basically going to continue reducing investor sentiment towards the GBP. As such, we are limiting GBPUSD upside gains to either USD weakness or eased UK household budgets following the drop in oil providing retail sales figures with a boost. So far, each of these have only provided the GBPUSD bulls with a short-term boost.
Bearing in mind all recent USD weakness has been temporary, any sudden USD gains could really put this pair at risk to dropping below 1.50 – which would have been completely unthinkable to even imagine as of August 2014.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
Follow Jameel on Twitter @Jameel_FXTM
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