A Chimera of challenges for the GBP near term
In Greek mythology the Chimera was a fire breathing monster with a Lion's head, a goat's body and a dragon's tail. In other words a world of trouble.
The GBP is facing it's own multi=headed problem at the moment as it's next challenge for 2020.
The Lion's head: A weakening data picture
Month on month GDP was down last week to -0.3% vs 0.0% expected. Month on month manufacturing was down in January to -1.7% vs -0.3% expected. Inflation data last week was a bad miss too with 1.3% printed vs an expectation of 1.5%. The bad retail sales miss of -0.6% was the final blow in my view which puts a rate cut front and centre for the Bank of England. This retail sales point included Black Friday sales and historically this retail sales point, at this point of the year beats expectations. However, this year it missed them. This is a very poor signal and acknowledgement that the UK consumer is cautious over Brexit concerns. Pounds are being kept in wallets and purses asBrexit uncertainty impacts UK consumer spending.
The Goat's Body: A rate cut ahead
We have had a string of warnings from Bank of England members last week: Broadbent, Carney, Tenreyo, Vlieghe and Saunderswere all sounding the alarm bell in favour of weaker interest rates coming for the UK. Now, at the last BoE meeting, there were only two bank members voting for cuts. That number has certainly risen now and the odds of a rate cut at the January 30th rate meeting are now greater than 70%. In December the odds of a January rate cut were only around 6%, so you can see the change that has taken place
The Dragon's tail: EU-UK trade negotiations
If you thought that the UK Parliament's long winded attempt to agree to a withdrawal agreement was bad, we have further chaos ahead. The EU will face difficulty keeping together all of their states in negotiations with the UK. Needless to say, the potential for chaos is high and will further weigh on uncertainty (and investment for the UK).
The Chimera was eventually killed, and this is the latest beast for the UK to fight, but a battle is ahead for the GBP. I am expecting near term GBP weakness and a return to 1.2800.
