Forex Flash: GBP/USD on the defensive as downside in focus – UBS

In theory, the inconclusive Italian general election result could have provided a temporary respite for sterling. And it did - but only for a few hours. However, it was not long before parliamentary testimony from Bank of England policymakers soon had the pound on the defensive once again and sterling's slow grind lower continued overnight, eventually sending Cable sub-1.51.

Yesterday, Deputy Governor Tucker floated the concept of negative interest rates, and said he hoped the idea would be looked into in more detail. Tucker went on to stress the importance of a "flexible" approach to interpreting the Bank's inflation-fighting mandate. Surprisingly he ventured that the Bank should not obsess about the CPI level on a two-year horizon and that it is the trend in inflation numbers that matters more. Asked about the concept of "helicopter money" he said it would be decision for the UK Treasury to make, and that the economic situation would have to get "much, much worse" before this would be contemplated.

He added that, as a matter of analysis, sterling's real exchange rate needs to fall, while stressing that the Bank does not target FX rates. According to Research Analyst Gareth Berry at UBS, “We remain short GBP/USD as a trade recommendation and see considerable scope for further downside even without a broad-based dollar rally.”