UK: Another hammer blow for sterling - SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that the UK Chancellor Phillip Hammond's observation yesterday that monetary policy represents the first line of defence for the UK economy in the face of the economic shocks from the UK's departure from the EU is another hammer blow for sterling.

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“So far it's stopped the pound's bounce in its tracks but before long it will deliver new lows against the dollar for sure, and perhaps against the euro too.

A substantial loosening of fiscal policy - and a major round of investment in creaking infrastructure - is the obvious response to the UK's self-inflicted shock. With real gilt yields deep in negative territory, forget austerity. But by the same token, to choose to try and offset the economic hit with even looser monetary policy - rate cuts and more QE - will drive the pound significantly lower.

The 10-year nominal Gilt/Treasury spread has already moved very sharply in recent days and sterling is likely to fall until that spread stops widening (as UK yields fall relative to US ones). In the long run, this is very bearish for Gilts, but that's for another day. In the short run, the UK could do with some (very) decent employment data.

We expect a 5k increase in the unemployment claiming count, a marginal uptick in the unemployment rate and 2.4% on exbonus average earnings. Not dreadful, but not enough to stop the tide.”