British Pound: Bad News in the Price, July Rebound vs. Euro and US Dollar a Possibility says one Analyst

- Bad news in the price of Sterling

- GBP could strengthen on the back of Brexit White Paper due for release in early July

- August is a 'now or never' moment for an interest rate rise at Bank of England

July should see Theresa May wring an unified stance on Brexit out of her cabinet, something that should be good for Pound Sterling. Image © Crown Copyright.

Pound Sterling limps into the two-day European Summit with traders opting to pare back exposure to the currency fearing further negative developments concerning Brexit, which alongside immigration forms a key topic for European leaders to tackle.  

"As for the Pound, its misery seems to know no end at the moment. With the Bank of England concerned about household debt, and investors doubtful about the smooth progress of Brexit despite Theresa May’s attempts at reassurance ahead of the day’s key EU summit," opines Connor Campbell, a financial analyst with Spreadex in London.

The Pound-to-Euro exchange rate trades towards the bottom of its six-month range at 1.1327 while the Pound-to-Dollar exchange rate is now at fresh seven-month lows at 1.3085.

Warning $GBP looking extremely vulnerable right now. Base case is that #GBPUSD hold's 1.30. But if #EURGBP posts a topside breakout from its narrow range, it doesn't look pretty for $GBP. Surprisingly UK data has been ok, but won't take much bad Brexit news to take the pound down pic.twitter.com/I5ZSYKh6Lj

— Viraj Patel (@VPatelFX) June 28, 2018

However one analyst tells us there is in fact potential for recovery in Pound Sterling as markets are already very pessimistic on the currency making it particularly sensitive to any rebound in sentiment.

"We can’t recall a period when the sentiment and news flow has been so consistently negative," says Derek Halpenny, European Head of Global Markets Research at MUFG, the global financial services giant.

When sentiment is extreme, as could be argued of the negative sentiment towards Sterling right now, the prospect for a rebalancing grows. 

"Our sense here is that a lot of bad news is now in the price," adds Halpenny who has considered a number of factors which could play in favour of a Sterling rebound over coming days and weeks.

The Economy Should be a Source of Support

On the economic front, Halpenny argues the all-important UK consumer might be stepping forward to help pull the economy forward as we move through the mid-year period as retail sales data so far this quarter "clearly point to the high probability of a rebound in Q2 real GDP growth," says Halpenny.

Data from the CBI released on June 26 meanwhile confirms a weather effect on retail sales is indeed feeding into a strong rebound for the sector with a net 32% of firms surveyed by the CBI reporting an improvement in trade.

Anna Leach, head of economic intelligence at the CBI, says higher-than-average temperatures seem to have had a positive impact on shoppers, with retailers benefitting from above-average seasonal sales and improved order volumes growth.  

"Extremely warm weather is increasing the chances of stronger consumer spending this month as well," says Halpenny.

Improving data should firm expectations for an August interest rate rise at the Bank of England which in turn provides support for Sterling.

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August is an important date owing to a changing of guard at the Bank of England with one member who is an advocate for higher interest rates being replaced by a more cautious member.

Ian McCafferty has long advocated for higher rates at the Bank, and given his last meeting is the August policy meeting, "it is looking increasingly like this window to hike could close after August with comments from his incoming replacement, Jonathan Haskell, suggesting he will be less hawkish," says Halpenny.

Halpenny notes Haskel is a productivity expert and crucially stated at a hearing before lawmakers that productivity growth could well be stronger than officially reported "which would imply a greater scope for leaving rates at lower levels without fuelling inflation," says Halpenny.

"In the June policy meeting the BoE positioned themselves well. Chief economist Haldane joined the usual two hawks in voting for an immediate rate rise. This forced the market to consider more seriously the risk of a rate hike in August. The result was a welcome boost to the value of the pound without the Bank positioning itself in a corner as it had done earlier in the year," says analyst Jane Foley with Rabobank.

"The Bank of England could offer support to the pound if risk of a 2018 rate hike can be nurtured," adds Foley.

Clarity on Brexit

While the economy continues to trundle along in a broadly GBP-supportive fashion, anxiety over Brexit remains heightened.

But even here, the contrarian who bets with the Pound could do well over the course of July we are told.

"The Pound is unlikely to respond to positive macro developments until there is clarity on Brexit. Here is where pessimism has clearly increased of late, adding increasing downside pressure on the Pound," says Halpenny. "But July will at least bring the possibility of some increased clarity."

An 'away day' for the government's top decision making body, the cabinet, is to be held on Friday, July 6. The 'away day' is to be held at the Prime Minister's official Chequers residence and an official White Paper covering unanswered questions should result from the meeting.

Key questions to answer pertain to the Irish border and the shape of the future customs agreement.

It could well be the case that should cabinet unity break out the Pound pops higher as expectations for a more rapid progress to a final Brexit deal becomes evident.

"With pessimism so high currently, the Pound could easily get a lift from the prospect of the UK government providing details on its negotiation stance and how it plans to resolve the Irish border issue," says Halpenny.

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