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MARKETS: Pound under pressure following BoE growth downgrade

12 May, 2017

By Jameel Ahmad, VP Market Research at FXTM

If investors were looking for a reason to sell the Pound at its recent elevated levels, they found encouragement this week when the Bank of England (BoE) downgraded on Thursday its growth forecast for the UK economy in 2017. Although a growth downgrade from 2% to 1.9% is hardly significant in the grand scheme of things, it has been used by traders as motivation to drag the Pound lower with the GBPUSD currently under pressure as trading concludes for the week.


 
Moving forward, the question to ask is which direction the Pound could next take. My opinion is that the BoE’s negative views on inflation pressures should weigh on investor sentiment for a while. In addition, there is another major potential event risk for the Pound with the general election just a month away.
Just because Theresa May is seen as the most likely candidate to win the election on June 8, it doesn’t mean that there won’t be volatility in the Pound during the run-up to the event. Also, investors have underpriced the risk of PM May not being victorious, meaning there could be some serious shuffling of positions if preliminary polls suggest that she does have a fight on her hands.
Another factor to consider in the future is how the prolonged Brexit negotiations with the European Union are likely to pan out, which is going to be quite a drag in the sand. It shouldn’t be misunderstood that the economic sentiment in Europe is gradually picking up decent momentum, and this could in fact provide the EU with some negotiating power when it comes to saying that it might be able to stand on its own feet with the United Kingdom as a fellow member.
Recent comments from Theresa May where she seemed to accuse the EU of influencing the upcoming elections are also not going to help secure the UK any leniency when it comes to a trade deal with Europe, if she ends up being the one to lead with negotiations.

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