Is the game up for GBP?

Economists take stock of the recent developments in GBP and look ahead to the prospects for the pound. The current market environment, with a distinct lack of focus on UK data, suggests that GBP will be beholden to global financial market developments as the pound has effectively decoupled from broader UK data trends. Nonetheless, news flow around cross-border M&A deals involving the UK has picked-up and could provide GBP with some flow support.In sporting parlance, it has been a year of two halves for GBP. Having outperformed its G10 counterparts in 1H15 (with the exception of CHF) and rising nearly 6% in TWI terms, 2Hperformance has been less impressive.

The GBP TWI is over 2.5% lower in 2Hwith only AUD, CAD, and NOK underperforming. Although this still represents a positive return on the year as a whole, much more had been expected from the pound particularly versus the EUR as the cloud of uncertainty of the May UK General Election lifted. That EUR/GBP has failed to make a sustained break below 0.70 says as much about the resilience of the EURin the face of GREXIT fears and ECB QE as it does about the poor performance of GBP.

"Nonetheless, with positioning light and with GBP having corrected from overbought levels, we continue to rely on our framework of policy divergence as the major supporting factor for a higher GBP over the medium term. The domestic fundamental backdrop remains strong and though we have recently pushed back our call for the first UK rate hike (May 2016), this is more hawkish than the end-2016 expectation of the UK rates market",says BofA Merrill Lynch.