The reasons for the recent pound’s sell-off are still on the table, so the currency remains extremely vulvnerable according to analysts at Rabobank. They point out the risk of GBP/USD hitting parity has firmed up.
“There has been a loose discussion in the market about the prospect of GBP/USD hitting parity for some months. This risk has firmed up in the wake of Friday’s tax giveaways from UK Chancellor Kwarteng, with both market pricing and some forecasters’ predictions now suggesting a tangible risk of GBP falling below 1.00. Of course, broad-based USD strength is an important element behind the softness of cable. In our view there will be no let-up in USD dominance for some months to come. The greenback continues to benefit from the hawkish position of the USD.”
“GBP/USD has edged higher in early European hours this morning, suggesting the extreme cheapening of UK assets over the past couple of sessions is attracting some interest. That said, the causes of the selloff in both gilts and in GBP have not been addressed and this suggests that the pound remains an extremely vulnerable currency.”
“In response to market turmoil, various UK lenders have confirmed that they are withdrawing a range of new home loans as deals are re-priced. Higher mortgage rates and higher prices of imported goods such as food and energy will increase the pain of the cost of living crisis for many UK households and threatens to undo any benefit from PM Truss’s tax breaks. This provides an opportunity for the Labour opposition which is currently holding its annual conference. As the 2024 general election nears, the pressure on Truss to appeal to voters will increase. Already speculation is appearing that she may not be able to hold on to office for very long. Political uncertainty in itself is a negative currency factor.”