The British pound continues to sell off as doubts grow regarding the next phase of Brexit negotiations. While the recent announcement of a breakthrough was hailed as a victory by both sides, the reality is that a trade deal remains distant. There is a risk that the pound continues weakening given upcoming PPI and CPI numbers later today. If inflation is lower than expected, hopes for rate hikes will fall accordingly. The pound bull market today is driven by expectations that the Bank of England will ultimately hike rates following a trade deal with the EU. We have argued in the past that this scenario is excessively optimistic, and that the pound is likely to take a breather in the short-term. Over the longer term, the currency remains substantially undervalued due to the uncertainty caused by Brexit. Our short-term and medium-term outlook remain bullish.
GBP/USD is currently just above 1.3340. EUR/GBP is up slightly today and the pair is currently trading above 0.8820. The pound is down against both the Australian dollar and the Canadian dollar. GBP/AUD is above 1.7680, while GBP/CAD is just above 1.7130.
This is an important week for economic data and events from the UK. Later today, we’ll see both producer prices and the consumer price index for November. Given steep expectations, there is a risk of a disappointment. On Wednesday we’ll get ILO unemployment and claimant count changes. Thursday is the big day, with a Bank of England rate decision and statement. While the Bank is widely expected to remain on hold, markets will be focused on the BoE’s inflation outlook for 2018. Last week, the pound rallied and then sold off following an agreement with the EU on the Irish border, the Brexit bill and the rights of EU citizens following Brexit.