Far from certain new UK PM could alter gloomy tone weighing on GBP – Rabobank

Commenting on the potential impact of the latest UK political developments on the British pound, Rabobank analysts argued the new British prime minister will be unlikely to substantially alter the gloomy tone that has been weighing on the GBP.

BoE’s mandate may have to be re-examined

"While tax hikes would boost demand, they could also create further inflation and counter the current policy tightening efforts of the BoE.  This could mean further rate rises from the BoE then would otherwise be the case, which would sap the growth potential that Truss hopes to create. "

"Truss at the weekend indicated that the BoE’s mandate may have to be re-examined.  She suggested that Japan may be able to provide examples of best practices.  This, however, only served to highlight how unaware Truss is of the deflation and growth issues that have plagued the BoJ for decades.  Additionally, any further signs from Truss that she could move to reduce the BoE’s independence will not be welcomed by GBP investors given fears that she may make the Bank a lackey to vote-winning government policies."

"Given our expectation that USD strength is likely to persist for around 6 months or so in view of risks to global growth, we foresee the potential for further sharp drops in the value of the pound.  We have revised lower our target for cable from 1.18 and see the potential for a dip to levels as low as 1.12 on a 1-to-3-month view.  The assumes a more sustained break below EUR/USD1.00."

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Eurozone Economy Grew 0.2% in 1Q; France Stagnates, Germany Avoids Recession

The Eurozone economy grew by 0.2% in the first three months of the year, but its post-pandemic growth weakened sharply toward the end of the period under pressure from the war in Ukraine and record-high inflation.

Eurostat's figures, released on Friday, mean that gross domestic product was up 5.0% from a year earlier, a time when the region's economy was still laboring under the worst of the effects from the pandemic. 

Both figures were largely in line with expectations, but masked some big divergences from consensus among some of the region's biggest member states. French GDP undershot expectations to stagnate in the quarter, while German GDP rose 0.2%, defying fears that it would register a second straight quarter of negative growth, thanks to strong investment spending.

At the same time, Eurostat said that inflation in the Eurozone hit a new record high since the creation of the single currency. Consumer prices rose 7.5% in April, up from 7.4% in March. While the slower rise in the headline rate suggests that an absolute peak for inflation may be near, underlying price pressures remained strong: core CPI rose by over 1% for the second month running, and Eurostat's harmonized measure of annual inflation excluding food and energy accelerated far more than forecast to 3.9% from 3.2% last month.

The euro rose by around half a cent against the dollar in the course of the morning as national GDP data were published in advance of the Eurozone numbers. By 5:20 AM ET (0920 GMT), it was at $1.0576, up 0.8% on the day. A bounce in Chinese assets in response to promises of more economic policy support from Beijing had also helped sentiment toward the euro and to risk assets more broadly.

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GBP/JPY consolidates in a range around 162.00 mark, downside remains cushioned

GBP/JPY struggled to capitalize on its modest intraday gains back closer to over a one-week high.

The cautious market mood underpinned the safe-haven JPY and capped the upside for the cross.

Subdued USD demand benefitted the GBP and extended some support, at least for the time being.

The GBP/JPY cross surrendered its modest intraday gains and was last seen trading in the neutral territory, around the 161.80-161.75 region.

The cross attracted some dip-buying near the 161.40 area on Thursday and climbed back closer to over a one-week high touched the previous day, though the uptick lacked bullish conviction. The European equity markets recovered from the overnight selloff, which undermined the safe-haven Japanese yen and extended some support to the GBP/JPY cross.

Apart from this, comments from Bank of Japan board member Asahi Noguchi, saying that the central bank must stick to its ultra-easy policy despite rising inflationary pressures, also weighed on the JPY. On the other hand, some cross-driven strength stemming from the fall in the EUR/GBP cross benefitted sterling amid subdued US dollar price action.

The combination of factors did provide an intraday lift to the GBP/JPY cross, through the prevalent cautious market mood kept a lid on any meaningful upside, at least for the time being. The market sentiment remains fragile amid fading hopes for a diplomatic solution to end the war in Ukraine and the prospect of more Western sanctions on Russia.

Hence, the focus will remain on new developments surrounding the Russia-Ukraine saga amid absent relevant market moving economic releases from the UK on Thursday. The incoming geopolitical headlines would influence the risk sentiment, which, in turn, will drive demand for safe-haven assets, including the JPY, and provide impetus to the GBP/JPY cross.

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