The EU repeal bill will dominate the British media spotlight this week, but what matters for the pound is what the ECB and the Bank of England say next
EUR/GBP: Draghi and Carney more important than politics now
GBP/USD: Cautious Fed talk amid weak US data won't spur $ optimism
While BoE officials may state that they are not targeting a specific exchange rate level, we suspect the trade-weighted GBP index around the 74 level - and close to historic lows - is in a territory that will warrant greater attention from policymakers. We note that the BoE has conditioned their August QIR forecasts based on the GBP trade-weighted index at 77. The current broad trade-weighted index is below 75; if it pushes lower or even remains at these levels, then in isolation it will warrant an upgrade to the inflation projections in November.
We wouldn't be surprised to hear greater BoE noise over sterling weakness, primarily in terms of what this means for inflation overshooting the 2% target and whether the growth-inflation policy trade-off has altered for some MPC members. While we acknowledge that domestically generated inflationary pressures remain soft, we could start to see references to GBP weakness and imported inflation having "second-round effects" (eg, rising imported input costs potentially boosting domestic prices).
Greater "weak pound" references in the context of BoE policy talk could, in turn, provide a backstop to the current GBP-selling environment.
The House of Commons reconvenes this week after its summer recess and will vote on whether to take the EU Repeal Bill to the next stage. Naturally, this story will generate some media noise. However, apart from keeping GBP on the back foot, we suspect any further idiosyncratic currency weakness would look excessive relative to the political risks at stake. Equally, the smooth passage of the EU Repeal Bill may not actively drive GBP higher, though it will certainly offer some good news amid a backdrop of Brexit-related negative sentiment.
The bigger driver for EUR/GBP this week will be the ECB meeting and whether President Draghi has the desire - and verbal firepower - to drive the EUR lower. We doubt the ECB President will be able to achieve this - at least without explicitly stating that the central bank will delay QE tapering in light of the recent EUR strength. But certainly, a more cautious ECB chief will attempt to rein in some of the EUR optimism in financial markets.