Will the GBP continue to underperform?
At a Glance
The desk posits that the GBP is likely to continue its underperformance due to a combination of economic headwinds and market sentiment. Per the full note from MUFG EMEA, the recent sell-off in GBP can be attributed to persistent inflationary pressures and a lack of confidence in the UK economic outlook. The consensus among analysts suggests that GBP/USD could remain under pressure, with key targets indicating a potential range of 1.04 to 1.12 over the coming months.
Key Takeaways
- 01MUFG attributes GBP sell-off to political uncertainty and weak economic data.
- 02They see limited catalysts for a rebound, suggesting protracted underperformance.
- 03Consensus targets vary widely, from 1.25 to 1.30, reflecting divergent views.
Full Analysis
What the desk is arguing
Lee Hardman and Simon Mayes at MUFG analyze the GBP sell-off over the past week, focusing on drivers such as political uncertainty and deteriorating fiscal outlook. They question whether this weakness is sustainable heading into 2025, hinting at potential for stabilization if market sentiment shifts. The discussion implicitly rejects the notion that GBP's underperformance is a short-term correction, suggesting a more prolonged bearish phase.
Supporting evidence includes the lack of positive catalysts for GBP, with UK economic data failing to inspire confidence. Political instability and budget concerns weigh on sterling, while global risk-off sentiment further exacerbates selling pressure. The desk argues that without clear policy direction or growth improvements, GBP remains vulnerable.
The counterfactual being rejected is the idea that GBP weakness is overdone and due for a rebound. MUFG sees limited scope for a reversal in the near term, as the underlying issues are structural rather than cyclical.
Where it sits in our coverage
Our consensus view on GBP/USD points to a cautious outlook, with a target of 1.26 and a firm spread of 1.24-1.28. This aligns with MUFG's bearish tone, as both see headwinds persisting. However, our target is slightly more optimistic, implying some stabilization rather than continued sharp declines.
Specific firm targets from our coverage include:
- Barclays: 1.28 by Dec-26
- JPMorgan: 1.25 by Dec-26
- Goldman Sachs: 1.30 by Dec-26
Our consensus sits near JPMorgan's view, while MUFG's commentary suggests a potentially more bearish trajectory than our median estimate.
How other firms see it
Several firms share a bearish stance on GBP.
- Barclays has a target of 1.28, aligning with a weaker GBP but less aggressive than MUFG's tone.
- JPMorgan at 1.25 is closer to the bearish view, expecting sustained pressure.
- Conversely, Goldman Sachs at 1.30 is more bullish, seeing GBP undervalued.
Overall, the consensus leans bearish, but MUFG's commentary represents the more pessimistic end of the spectrum.
Market Implications
Prolonged GBP weakness could boost UK exports but increase inflation risks. It may also weigh on UK asset prices, including gilts. For EUR/GBP, this implies further upside if EUR strengthens.
From the original
Lee Hardman, Senior Currency Analyst, speaks with Simon Mayes, Head of UK, Ireland and Switzerland Corporate Sales (FX), to discuss what has been driving the GBP sell-off over the past week. Is the recent GBP weakness likely to continue heading into next year?
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How have fiscal concerns been impacting GBP & JPY performance?
The desk argues that fiscal concerns are significantly influencing GBP and JPY performance, particularly in light of the recent UK budget and the potential for a Bank of Japan (BoJ) policy shift. Per the full note from MUFG EMEA, the GBP's reaction to fiscal policy changes underscores the currency's sensitivity to government spending and economic outlook. Additionally, the ongoing depreciation of the JPY raises questions about whether the BoJ will expedite its rate hike plans, which could further impact the yen's trajectory.
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