Lee Hardman, Currency Analyst at MUFG, suggests that the pound continues to underperform so far this year alongside the US dollar undermined primarily by building Brexit risk.
Key Quotes
“Cyclically the UK economy appears to be holding up better than feared so far as evident by the still robust pace of economic growth in the services sector which expanded by 0.8% in Q4. However, leading indicators are signalling that the UK economy appears to have slowed more sharply early this year as Brexit uncertainty has intensified.
The vulnerability of the pound to heightened uncertainty resulting from Brexit was highlighted yesterday by the report that the UK posted a record current account deficit in Q4 totalling 7.0% of GDP. For the calendar year as whole the current account deficit remained elevated at 5.2% of GDP.
The ONS estimates that just under 80% of the deterioration in the current account deficit since 2011 has resulted from falling receipts from UK investments abroad. The ONS has suggested two main reasons for the decline in receipts: i) the sharp decline in commodity prices and ii) weak growth in the euro-zone. It suggests that the current account deficit is unlikely to improve materially in the near-term unless there is a forced adjustment in the event of Brexit. The wider deficit has increased downside risks to our forecast that the trade-weighted pound could fall by 10-15% in the event of Brexit.”
(Market News Provided by FXstreet)