Uncertain outlook to keep Sterling under pressure

GBP was a notable G10 underperformer last week after the BoE's "Super Thursday" saw the MPC indicate a high degree of uncertainty regarding the economic outlook and appropriate timing of rate rises, encouraging cautious GBP view of gradual outperformance against the EUR but material depreciation against the USD. 

This more cautious approach was most obviously reflected by the fact that just one MPC member (Ian McCafferty) voted for a rate hike, versus the 2-3 expected by the market. 

"The MPC is likely becoming uncomfortable with the persistent sterling strength, and with the Bank Rate close to the effective lower bound, a much weaker currency has likely become necessary for the Bank to achieve its inflation target", says Barclays.

Furthermore, the relatively dovish BoE tone sits in stark contrast to the Fed's recent adjustment of the text of its July statement to highlight the strength of incoming US data. 

"With a September rate hike less than 50% priced, a continuation of this dynamic should support further divergence in UK-US interest rates and additional GBPUSD depreciation toward our year-end forecast of 1.45", forecasts Barclays. 

The recent sharp increase in the GBPUSD option skew to historically high levels makes options a cheap way to position for GBPUSD downside. Indeed, GBPUSD three-month 25-delta risk-reversals, normalized by three-month implied volatility, suggest that GBPUSD puts are approaching their deepest discount versus calls based on data since 2010.

"UK labour market data should reveal that June unemployment remained at 5.6% as job creation continued to slow. Average weekly earnings growth is likely to slow to 2.9% y/y from 3.2% on lower bonus pay, while core earnings should pick up slightly, to 2.9% after 2.8% in May. In line with weakening employment surveys, the claimant count for July will increase slightly, by 3.0k", added Barclays.