UK: Domestic factors pulling GBP in opposing directions – Lloyds Bank

In view of analysts at Lloyds Bank, GBP is likely to be influenced by domestic forces which includes Brexit negotiations and evolving UK interest rate environment.

Key Quotes

“Two key domestic forces will heavily influence the British pound in the coming months. First, the progression of Brexit negotiations. Recent intra-day price action, in response to lead EU negotiator Michel Barnier’s suggestion that talks had stalled highlight how sensitive the pound is to Brexit developments. To this point, there has been little substantive progress, and with the size of the “divorce payment”, status of EU citizens in the UK and management of the Irish border, all still unresolved, a question remains over whether Barnier will be given the green light to engage in discussions on the future relationship this year. In fact, with negotiations seemingly at an impasse, it was recently reported that UK sources see a “Brexit breakdown” if the EU refuses to compromise. With relations fraying, this issue has further potential to weigh on sterling.”

“In contrast, the second factor – the evolving UK interest rate environment – has been supportive of the pound. Following the more ‘hawkish’ than expected minutes from September’s BoE policy meeting and upbeat comments from MPC policymakers, including Governor Carney, the market is ‘pricing in’ an 85% chance of the committee voting, in November, to take back last year’s emergency cut. We expect a further 25bp increase in rates in August 2018.”