GBP: The other dollar – MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that they expected after the election of Donald Trump that there was an increasing chance that expectations of a stronger US-UK relationship post Brexit with Trump in the White House would result in the pound being viewed increasingly like the US dollar.

Key Quotes

“Yesterday, was a good example of that with EUR/GBP moving more in line with the EUR/USD drop than GBP/USD. Sure, the ECB announcement meant the euro was the mover yesterday but in the past on days of EUR moves, GBP/USD has moved more in sync. A look at rolling correlations does also confirm this with the 60-day rolling correlation between EUR/USD and EUR/GBP jumping sharply from -0.72 on 8th November when Trump was election to +0.43 as of yesterday. At the same time, the GBP/USD correlation with EUR/USD is weakening.”

“The resilience of the UK economy is also highlighting the similarities in the UK and US economic cycles (cyclical lows in unemployment rates; strong consumer spending and finally rising wage growth). A test of that theory might come next week when the FOMC announces its rate hike but nonetheless, we do believe GBP/USD volatility related to EUR/USD will continue to diminish and hence why we assume when EUR/USD falls below parity next year, EUR/GBP will be dragged to levels below 0.8000.”