We’re holding a stable outlook for the pound over the next month as the UK currency seems to have bottomed out against the dollar and the prospects of a correction higher seems increasingly favourable. The outlook for the pound is strongly correlated to the progress in the Brexit process and all signals now point towards a smooth transition towards a soft exit from the European Union. PM May’s government has been able to remain undefeated on all changes proposed to the withdrawal bill suggesting that the downside risks have eased.
Having said that, the recent data from the United Kingdom has printed consistently below expectations which creates a challenge for the pound. The weak Q1 performance for Britain doesn’t seem to pick up which will mean the Bank of England will have a hard time building a case for tightening during 2018. Albeit, our expectations for a positive performance from the pound are based on our base scenario for a weaker dollar over the second half of the year.
The recent Fed meeting hiked interest rates as expected and pointed towards two more increases in 2018 but the market’s reaction clearly suggests that investors are well-positioned for a more bullish US central bank policy. However, Donald Trump’s decision to impose more tariffs against China means that the trade disputes between the two strongest economies in the world will continue. And this is a strong risk catalyst for the dollar and we expect the greenback to weaken as the lack of additional monetary stimulus combined with continued risk tensions doesn’t bode well for the currency.
Summarizing our views, the pound/ dollar will likely remain largely unchanged over the next few weeks. With a clear lack of positive drivers for both parts of the currency pair, it will be a battle of attrition and we think that this will keep prices trading within a set range. From a technical perspective, this means that Cable will remain between 1.32 and 1.35 and the most profitable strategy to employ as long as this lasts is to look for reversal signals close to the edges of this area.