As we head into 2015 we’re looking for potential trade ideas, and GBP looks a worthy short when considering the potential challenges heading its way. The U.K is looking at an adjustment in growth outlook and possible fiscal consolidation, coupled with the political uncertainty that comes with a general election.
Throughout 2015 GBP performed relatively well as we favoured short EUR/GBP, but was GBP/USD could not hold off the USD strength. After spending plenty of time in the money only to fall short of our latest profit target EUR/GBP appears to have stalled As a result we closed this position for a small loss after its recent rally.
We had a positive outlook on GBP as the U.K outperformed its counterparts on the growth front, and although we expect the U.K to maintain a path of positive growth, the pace is likely to be at a lesser rate, which will impact on the attraction of GBP.
With the U.K economy performing well interest rate expectations (especially versus EUR) drove flows into GBP. This was also helped by an improving labour market! However, as we assess where we currently stand it is clear that the lack of wage growth and inflation means investors aren’t expecting a rate hike until the late stages of 2015 – this explain GBP’s inability to counter the USD strength.
Now we must also consider the lack of political conviction in the U.K public as a major risk to GBP outlook. No part has the luxury of calling themselves the majority favourite and political uncertainty a massive problem for any investment decision.
There isn’t anything between the 2 major parties (Conservatives and Labour), but are both have historically low levels of support. Add the addition of non-traditional parties gaining support and we have an election that is virtually impossible to call.
Even after the election the risk of fiscal tightening, and the U.K’s position within Europe add more uncertainty to the GBP’s investment environment. The U.Ks fiscal position has not improved and will therefore become the focus of the incoming party.
Fiscal consolidation will lead to a downward revision of U.K growth outlook, which will impact on interest rate expectations. This will likely weigh on GBP/USD – especially if the U.S maintains its current economic path.
All the uncertainty could make the U.K a less attractive investment destination that often results in slowed investment flows, just look at the Euro and Eurozone as an example.