GBP/USD:  Pound underperforms as it faces headwinds from a lagged recovery – CitiBank

Analysts at Citibank point out the pound is underperforming relatively to G10 currencies as it faces headwinds from the UK economy and uncertainty. The forecast GBP/USD at 1.25 over the next three months and warn that persistently high unemployment risks persistently higher savings and a weaker rebound, which may weigh on sterling.

Key Quotes:

“We think GBP underperforms other G10 currencies as it faces headwinds from a lagged recovery relative to its G10 peers. As uncertainty persists, Citi’s view is for the Bank to formally no longer rule out the step below the zero line. More QE and fiscal easing are likely be the first lines of policy defence in case of a hard exit from the EU single market and customs union at the end of the year.”

“Downside surprises on the recovery make us believe that the pressure on the BoE to do more may rise again. We now expect a 10bp rate cut and a £50bn QE top-up by November, as well as negative Bank rate and further QE next summer.”

“The 55d MA at 1.2418 gave away on a daily closing basis, would suggest further extension towards the supports around 1.2250 (April lows and the 76.4% pullback). Resistance may find at 200d MA at 1.2693.”