Under 1.30: what’s next for GBP/USD? Two opinions

 GBPUSD hit the 1.30 tactical target we established in the immediate aftermath of the referendum, trading to a low of 1.2798 as risky assets underperformed in Asia, and we continue to see risks as lying to the downside for the pound. 1.2753, which represents a June 85 weekly low, is viewed as an important support on the downside.

Here is their view, courtesy of eFXnews:

The next catalyst for a GBP sell-off could come from the Bank of England next week. In our view the market is still likely under-pricing BoE easing, with our economists forecasting a 25bp rate cut next week followed by a 25bp cut at the August meeting and GBP 100bn worth of QE (including corporate bonds) to be announced by the November meeting. Lower rates and reduced FDI should leave the GBP vulnerable for some time to come.

Some of the UK’s most prominent open property funds stopping withdrawals to try to avoid fire-sale type of liquidations have put market attention on the 45% foreign participation within those funds. It underlined the significance of foreign selling of GBP-denominated assets. With foreign liquidation there is now a growing risk of the UK’s financial account dipping into the red which, coupled with the UK’s substantial 7% of GDP current account deficit, could lead to an emerging market-like FX reaction.

GBP is at risk of undershooting. However, as long as the GBP decline does not trigger additional UK asset price weakness and volatility elsewhere, local authorities should be fine with a lower GBP.

Front-loaded GBP weakness could even be beneficial for the UK, allowing it to generate inflation expectations which, in conjunction with lower nominal bond yields, could channel real yields to low enough levels to support investment picking up. The BoE’s financial stability report clarified that any weakening of the UK’s financial conditions would see the BoE easing. This approach is justified, given high private sector leverage ratios.