GBP/USD: Spending will not alleviate Brexit pressure – Rabobank

The cable gained some traction yesterday following the resignation of the Chancellor Sajid Javid, but analysts at Rabobank are still seeing hurdles in the path for the pound. 

Key quotes

“The pound has held on to most of the gains that it made yesterday on the news that Chancellor Javid had resigned. The market’s collective conclusion is that will likely result in a greater amount of government spending.”  

“The implication is that there may be less need for the BoE to cut rates to keep the economy supported – which is clearly GBP positive.”   

“GBP will remain vulnerable to any signs of friction stemming from the talks between the EU and the UK on their future post Brexit arrangement.  Consequently we continue to see GBP/USD as likely trading below the 1.30 level on a 1 and 3-month view.”    

“A common rule of thumb is that a 1% shortfall in UK GDP growth could increase the government’s budget deficit by around 0.7% of GDP.  This would imply that the downward revision to the BoE’s growth forecasts would give rise to a step up in gilt issuance in the coming years.”