The GBP has had a major rally but this is more to do with USD weakness than GBP strength. In terms of the fundamentals their long-term bearish for the GBP...
U.K. growth has lagged behind the world’s biggest economies since the Covid-19 pandemic and is substantially below the OECD average, according to a new report from the influential Paris-based group. (CNBC) U.K. gross domestic product has contracted by 0.4% between the fourth quarter of 2019 and the third quarter of 2022, versus cumulative 3.7% growth in the 38-member Organisation for Economic Co-operation and Development.
The size of the task facing the Government is huge going forward in terms of returning the UK economy to sustained growth: “The UK’s debt-to-GDP ratios are set to rise, and net gilt supply may exceed GBP250bn which would be a new record high. The UK’s fiscal deficit looks likely to go up to 6% of GDP. The UK’s core balance (i.e. current account balance + net foreign direct investment) has declined from a 2% surplus to an 8% of GDP deficit in the last two years.
Just like most other majors the GBP has benefited from the market taking the view the Fed will be dovish going forward and we think this view is discounted and the Fed will be more hawkish than the market expects:
“Our suspicion is that the Fed will maintain its hawkish narrative for longer, implicitly or explicitly protesting against the recent drop in yields. After all, endorsing the market’s dovish narrative may be premature and risky for the Fed whose plan should be to let markets do the heavy lifting in tightening – and we are bearish on Treasuries in the near term. A still highly inflationary global environment may struggle to live with sub-3.50% 10-year yields.” (ING THINK)
The Fed will hold rates higher for longer than the market expects and the US economy is doing far better than the UK – The rally in GBP/USD is a sell in our view.
The rally up from the 1.1600 level is largely USD weakness and we expect a break of nearby support to target this level with a stop behind the recent candle tail which we think could be an exhaustion of the bull trend.