Weekly Report

With the uncertainties linked to the Scottish referendum behind us and the comfortable margin of the pro-union victory, a short-term pickup in Sterling demand was expected. Even though the British pound did strengthen, the scope of its appreciation suggests a limited buying interest. Part of the reason likely stems from the policy outlook from the Bank of England (BoE). It remains likely that the BoE will be the first major central bank to raise rates. However, compared to the US, this early hike is not as important as the subsequent path rate. Indeed, the BoE is in no position to follow a path rate as aggressive as indicated by the Fed’s projections. Furthermore, although the relative monetary policy favours a weaker EUR/GBP, the disinflationary pressures in Eurozone could slow the BoE’s normalisation process. Indeed, persistent weak demand from UK’s main trading partner is likely to lead to margin erosion (as prices are lowered), causing weaker wage growth (which is a key input in BoE’s monetary policy) and weighting on inflation and GDP. Finally, as explained in a previous report, UK’s large current account deficit is likely to be an obstacle for sustained GBP appreciation. As a result, the GBP supporting driver stemming from the proximity of the first BoE’s rate hike is unlikely to have a lasting effect as wage growth and GDP are likely to stall unless the Eurozone economic outlook improves (which would then also reduce selling pressures in Euro).