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GBP: Summer Haze Summary

Core Content

This report from BNP Paribas provides a strategic outlook on the British Pound (GBP) for the summer period, focusing on the interplay of domestic economic data, global developments, and political factors. It emphasizes that while there may be opportunities for GBP to strengthen, the risk/reward balance is not yet compelling enough for structural long positions.

Key Messages

• GBP Outlook: The GBP is expected to be influenced by domestic economic data and global developments rather than Brexit news, which is likely to remain subdued until September.
• Market Sentiment: FX investors currently hold moderate short GBP exposure, indicating a less extreme bearish sentiment compared to earlier in the year.
• Central Bank Policy: While several central banks are expected to ease policy, the Bank of England (BoE) is likely to remain on hold in 2019. However, there is a 15% probability of a 25bp cut by September and ~53% by year-end.
• Valuation: The trade-weighted GBP has weakened, and the BNP Paribas CLEERTM model suggests GBPUSD and EURGBP may trade near 1.17 and 0.94, respectively, which are relatively close to current levels.
• Political Environment: The current political climate is less supportive of GBP compared to Q1 2019, with the EU showing hostility to further Brexit extensions and the new PM less likely to request one. The rise of the Brexit Party and smaller parties may complicate the political landscape.

Domestic Economic Data

• UK economic data has been weak, with PMI surveys indicating -0.2% q/q growth in Q2.
• Industrial and manufacturing production saw sharp contractions in April and disappointment in May.
• Retail sales have also been lacklustre.
• Q3 is expected to show limited improvement, as the stockpiling effect has not significantly boosted data.
• The BNP Paribas data surprise index for the UK is at extreme lows, suggesting market expectations are already depressed, which may allow for some upside surprises.

Global Picture

• Global central banks are expected to ease policy, but the BoE is likely to remain neutral.
• The BoE's focus is on medium-term inflation dynamics rather than political developments.
• Market positioning and expectations for rate cuts elsewhere may limit the BoE's ability to cut rates in the near term.

Valuation Analysis

• The GBP is trading near the low end of its range since Article 50 was triggered.
• The CLEERTM model suggests GBPUSD and EURGBP are near fair value under current assumptions.
• Fundamentally, GBP is unlikely to trade much weaker in the near term, especially in the EURGBP cross.

Political Outlook

• The new UK Prime Minister is less likely to request an extension of Article 50, and both leadership candidates have clear Brexit positions.
• Parliament may not be as effective in preventing a no-deal Brexit as it was in Q1.
• The political landscape is shifting, with the rise of the Brexit Party and smaller parties, potentially leading to more volatility in the Brexit debate.
• Labour's stance on a second referendum is not yet solidified, and the political environment remains uncertain.

Market Positioning

• FX investors have moderate short GBP exposure (-16 on a +/-50 scale), which is not as extreme as in December 2018.
• This suggests that market positioning is unlikely to amplify any fundamental moves in GBP, as it did in Q1.

Conclusion

• While there are some tactical advantages to long GBP positions due to valuation and potential upside surprises in data, the risk/reward is not yet attractive enough for structural longs.
• The political outlook and market positioning suggest caution, and the report advises patience over the summer period.

Important Disclaimer

• This document is a marketing communication and not investment research.
• It may contain "Research" under MiFID II unbundling rules and is intended for professional clients and eligible counterparties.
• It does not constitute an offer to sell or issue any financial instrument.
• It is not intended to provide investment, tax, or legal advice.
• All information is based on public sources and may not be accurate or complete.
• The document may contain performance data based on back-testing and is for illustrative purposes only.
• BNPP may have conflicts of interest due to its involvement in transactions or advisory roles related to the instruments discussed.
• The document is subject to change and is not to be relied upon as authoritative.

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