UK PMIs to drive further sterling weakness, historically wide Fed-BoE gap a risk

Following recent confirmation of the government's planned fiscal consolidation and the BoE's dovish stance, disappointing activity data and ECB easing are likely to keep downward pressure on GBPUSD this week. November manufacturing (Tuesday) and services PMI (Thursday) are expected to fall to 53.1 (consensus: 53.6; last: 55.5) and 54.3 (consensus: 55.0; last: 54.9), respectively. 

Furthermore, the market expects the November construction PMI to also moderate to 58.5 from 58.8 in October. While ECB easing is likely to support GBP appreciation versus the EUR, GBPUSD should fall if historical sensitivity to changes in EURUSD, of about 75%, holds. 

While the lower GBPUSD view remains very much intact, helped by the USD's higher returns to capital and better safe-haven characteristics, a repricing of extremely dovish BoE rate hike expectations has become a significant upside risk. Interest rate markets are currently expecting the first Fed rate hike by January 2016 versus late Q416 for the BoE, a historically long delay. 

There tends to be a high positive correlation between both the slope of the USD money market curve and the level of USD short forward rates and their GBP equivalents, so a December move by the Fed might see the market reassess the Fed-BoE "gap", representing an upside risk to the GBPUSD forecasts.