Near-term balance of risks points towards further GBP upside – London Business News | Londonlovesbusiness.com

While the GBP trades softer this morning, with cable easing back below the 1.34 figure, the near-term balance of risks continues to point towards further GBP upside, even if markets have little by way of external data catalysts to digest this week.

Key to underpinning the GBP’s solid performance of late, with cable having rallied over 3% from the mid-September lows, is the continued divergence between the BoE, and the FOMC’s, chosen policy paths.

With the FOMC having delivered a jumbo 50bp cut at last week’s meeting, and speakers since having indicated a desire to return to a more neutral stance sooner rather than later, a gulf has opened between this dovish stance, and the BoE’s slower and steadier approach to removing policy restriction. It is, hence, unsurprising to have seen a continued widening in the Gilt-Treasury spread, which in turn has provided a tailwind to the GBP.

Looking ahead, there seems, for now at least, little sign of this policy divergence diminishing any time soon. This is particularly true considering that four of the 9-member MPC voted against the 25bp cut in August, with these hawks seemingly having not changed their views since, as external member Greene noted this morning, in continuing to favour a ‘gradual’ approach to further easing.

The most significant risk to this bullish GBP view remains the precarious fiscal outlook here in the UK, with the 30th October Budget likely to see a rather toxic combination of significant tax hikes, and spending cuts. This cocktail, if as drastic as media reports currently indicate, risks choking off economic growth, potentially forcing a BoE pivot.

In the meantime, however, momentum remains with sterling bulls, albeit with positioning somewhat stretched, meaning a test of the 1.35 handle could well be on the cards before too long.