If investors were looking for a reason to sell the Pound at its recent elevated levels, they found encouragement yesterday when the Bank of England (BoE) downgraded its growth forecast for the UK economy in 2017. Although a growth downgrade from 2% to 1.9% is hardly significantly material in the grand scheme of things, it has been used by traders as motivation to drag the Pound lower with the GBPUSD currently under pressure as trading concludes for the week.
The question to ask moving forward is which direction the Pound could take next. My personal opinion is that the BoE’s negative views on inflation pressures should weigh on investor sentiment for a while. In addition, there is another major potential event risk for the Pound ahead with the General Election just a month away.
Just because Theresa May is seen as the most likely candidate to win the election next month, it doesn’t mean that there won’t be volatility in the Pound during the run up to the event. My view is also that investors have underpriced the risk of May not being victorious, meaning there could be some serious shuffling of positions if preliminary polls suggest that Theresa May does have a fight on her hands.
Another factor to consider in the future is how the prolonged Brexit negotiations with the European Union are likely to be, which is going to be quite a drag in the sand if I am honest with you. It shouldn’t be misunderstood that the economic sentiment in Europe is gradually picking up decent momentum, and this could in fact provide the EU with some negotiating power when it comes to saying that it might be able to stand on its own feet with the United Kingdom as a fellow member.
Recent comments from Theresa May where she seemed to accuse the EU of influencing the upcoming elections are also not going to help secure the UK any leniency when it comes to a trade deal with Europe, if she ends up being the one to lead with negotiations that is.