GBP monthly currency outlook (1-3 Month)

The commodity currencies underperformed GBP in Q3, and EUR/GBP is 500pts (7%) higher than the July low. Various explanations have been put forward for GBP's underperformance, including growing concern on the funding of the UK's gaping current account deficit and the rising risk of EU exit. Both are legitimate concerns, but these are still seen as tail risks, rather than key drivers. In reality, GBP underperformance in Q3 was a much more "vanilla" story of rate spread dynamics. 

The decline in UK rate spreads has been almost entirely "passive" in nature, rather than reflecting an "active" policy debate, says RBC Capital Markets. The decline in yields since mid-July has been a global phenomenon and UK yields have declined more simply because rates (spot and more so forward) are not at the zero bound. In other words, the UK is a "high beta" market when global yields are falling in tandem . 

"We put recent GBP underperformance down to a temporary decoupling from domestic fundamentals as global factors have dominated and expect a recoupling in Q4 with GBP outperformance reasserting itself", states RBC Capital Markets.