Dovish BoE and soft employment report keeping GBP under pressure

Last week's BoE communication was dovish, highlighting the MPC's anxiety about the external environment, particularly in EM economies and the downside risks it poses to the UK's domestic outlook. The Bank revised its growth and inflation forecasts lower and projected a shallower path of rate hikes. Importantly, the BoE emphasized the impact of trade-weighted GBP appreciation and the risks it posed to achieving its 2% inflation target saying "the dampening influence of sterling's past appreciation on inflation is expected to be persistent". 

"Our reading of the MPC's analysis implies a modest risk that the Bank Rate stays at its effective lower bound for longer, should GBP appreciation pressures persist. We continue to expect only modest GBP outperformance versus the EUR and material GBPUSD depreciation in the coming quarters", says Barclays.

The September employment report (Wednesday) will be the next important data point for GBP. The unemployment rate is expected to remain unchanged at 5.4% and look for a somewhat softer pace of wage growth. Average weekly earnings are expected to post a 2.9% 3m/y increase, below consensus expectations of a 3.2% 3m/y increase. Core wages should increase by 2.8% 3m/y, in line with consensus expectations. A confirmation of the forecast in addition to the recent dovish BoE rhetoric will likely keep GBP under pressure. 

"We prefer to express this view against the USD and expect upticks to provide better levels to re-engage in short GBPUSD positions", added Barclays.