Video transcript

FX market update

Oliver – Hello and thank you for joining us for the latest instalment of Barclays FX market outlook. I’m Oliver Pryke from Barclays Corporate FX Sales and I'm joined once again by Marvin Barth, Head of FX Strategy for Barclays Investment Bank. Marvin, thank you so much for joining us today. 

Marvin – Thank you for having me.

Oliver – What are our overall expectations for FX Markets over the next year? Are we going to see a continuation of what you’ve previously said are “boring” G10 forecasts? 

Marvin – Yes Ollie, finally we do expect G10 FX markets to awaken from their slumber! After a year of forecasting ‘boring’ G10 FX prices — and being rewarded with directionless markets — we think the downshift in the global economy will provide some movement in FX markets this year. Emerging markets, one of the exceptional areas of FX volatility last year, continue to bear the brunt of the FX adjustment in our forecasts, but we see increasing differentiation, not only at a currency level, but now increasingly at a regional level.

Our updated forecasts reflect the clear downshift of global economic growth and consequent shift in direction of central bank policies (with few exceptions), but also an increasing dose of uncertainty as we really think we’re following a bumpy, unmapped road here. 

Oliver – Given all the uncertainty between the US and China, what are the expectations for US and China growth?

Marvin – Ollie, our expectations for US growth to temporarily slow to about 1% annualized by year-end, prompts the Federal Reserve to cut 75 basis points this year in our view, but that really sets the stage for a rebound in the US economy next year in it’s extension of the US expansion. In China we expect growth to slow to about 5.5% — on a full-year and official basis, actual growth may be even slower than that — this is as the trade wars and rebalancing in their economy increasingly start to bite; and Europe increasingly faces the dilemma of slowing, underperforming growth with fewer policy degrees of freedom, and having never normalised policy in their brief growth spurt of 2016-2017, they’re still struck near the effective lower bound of interest rates.

Oliver – And what about growth in Emerging Markets? 

Marvin – Well Ollie, EM continues to struggle to find a new growth model and that is further impaired by the more challenging global growth environment that we’re forecasting. Yet, I think it’s important to emphasise that all aspects of our global growth forecasts right now are fraught with an unusually high degree of uncertainty stemming from the mercurial approach to trade of President Trump, as well as central banks that appear to be shifting their reaction functions (and probably even goal posts), and this is all amid increasing geopolitical frictions and rapid technological transformation of the global economy.

Oliver – Turning our attention now to sterling, what is Barclays’ view for the pound, will its direction continue to be dominated by Brexit headlines?

Marvin - Yes Ollie, in our forecasts, sterling does continue to be held down by Brexit but also by election uncertainty despite the likely resolution of the leadership race currently underway, with Boris Johnson as the frontrunner to become the new Tory leader and prime minister succeeding Theresa May. Now Mr. Johnson has publicly committed to hold fast to the new Halloween deadline for Brexit, but he still has a parliament that has thrice rejected the agreement on the table, and the current EU leadership is rejecting any renegotiation and even they are hamstrung by the fact that we are unlikely to get a new Commission over the course of the summer, so it is unclear how Mr. Johnson can deliver on a promise other than a ‘no deal’ Brexit, even though he has publically said he thinks that’s a low risk, personally.  While the risks of ‘no deal’ clearly are higher as a result in our view, another alternative, depending on the evolution of polls – where both Tories and the Labour party have fallen – is a new election. Now that brings a whole new set of risks for sterling in our view, including heightened uncertainty because of the increasing dispersion of polls across different parties, as well as markets’ unease with the prospect of a profound change in UK economic policy that would occur under a Jeremy Corbyn-led government should he win (which of course Mr. Corbyn has used as a de facto endorsement!).

An exit with a transition agreement still remains our base case, but the risks around that scenario are rising and likely are going to keep sterling under pressure in our view. Even in our base case, the longer-term uncertainty over what a trade deal ultimately will look like, along with the worsening outlook for Europe, takes cable down to 1.20 in our forecast while EURGBP continues to linger around current elevated levels.

Oliver - Thank you very much for your time and insight there Marvin. Some great insights. I look forward to speaking to you again soon so I can pose some questions from our clients directly.

Marvin – Thank you for having me.

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