Pound sterling is higher against all major currencies except the Canadian dollar. The British pound is currently the strongest versus the Japanese yen and the Australian dollar. Yesterday, the pound continued to move higher against the euro, while ending flat against the US dollar. As GBP/USD still looks oversold, we believe the pair is due for a short-term bounce.
Turning to recent developments, today is an important day for the currency thanks to an upcoming Bank of England interest rate decision. Following comments from Governor Mark Carney and weak economic data, there is very little hope for a rate hike. As we wrote yesterday, a "hawkish hold" - keeping rates unchanged while signaling potential rate hikes in the future, is the best that pound bulls can hope for. Beyond the BoE's decision, there are also many economic data releases scheduled for today. After a significant deterioration from its peak in early February, recent economic data from Europe has been slightly better than expected. If today's figures and guidance from the Bank of England are better than expectations, the pound should find some strength (particularly against the US dollar).
Turning to Brexit negotiations, Irish Prime Minister Leo Varadkar called Theresa May's customs partnership idea a "welcome suggestion". While EU negotiators had initially dismissed the idea, there may be a recognition that May is unlikely to pursue a full customs union with the bloc. As we have described in previous commentaries, the customs union issue remains a significant roadblock for Brexit negotiations. Our short-term and medium-term outlook on the pound is bearish.
GBP/USD is currently above 1.3570. EUR/GBP is down slightly, with the exchange rate above 0.8740. The pound is up slightly against the Australian dollar and flat against the Canadian dollar. GBP/AUD is currently above 1.8170, while GBP/CAD is above 1.740.
This is an important week for the British pound economic calendar thanks to an upcoming Bank of England meeting. YoY Halifax house prices for April (2.2% vs. 3.3% expected) were lower than expectations. BRC retail sales for April (-4.2% vs. -0.8% expected) were significantly below expectations. The RICS housing price balance for April (-8% vs. -1% expected) was significantly below expectations. Later today, we’ll see industrial and manufacturing production for March, as well as the total trade balance for March. More importantly, we’ll see the Bank of England’s interest rate decision, its minutes and hear a speech by Governor Carney. While expectations for a rate hike this week were above 80% a few weeks ago, market-implied odds have fallen to below 15% following Carney’s latest comments and weak GDP data. As a result, the consensus expects the BoE to keep rates on hold. Last week, services PMIs were below expectations.