Pound sterling seemingly can’t get up off the floor after its EU referendum-inspired knock out and it’s about to get kicked while it’s down. Real wages are falling across the UK. Q3/Q4 2016 surprised many analysts with a stubborn resilience in UK economic output and consumer confidence. This period was likely due to a false surge of front-loaded consumer purchases in anticipation of price hikes on goods and services that won’t be matched by wages. Going forward, household spending will be strained by the squeeze on real incomes that had already begun in the UK before the referendum. Just when the exports sector is needed to plug the gap left from crimped consumer spending, political challenges will limit the scope of future trade deal negotiations. Negotiation uncertainty will plague the pound at least throughout 2017 and much of 2018.

Short GBP/USD positions are attractive as the Fed hiking cycle is in its infancy and UK data will disappoint on a relative basis. The strongest short GBP play will be against JPY if political risk-aversion sets in over the US failing to enact the Trump Administration’s highly anticipated pro-growth policies to the full extent hoped. It is becoming increasingly apparent the growth policies promised can not be enacted without blowing a truck-sized hole through the US budget or offsetting them with vicious negative side effects (as the BAT would). GBP/JPY is currently the FX pair most likely to sustain trauma when investors flee risk assets.

Take a look at the “unaffordability index” for private rents in London below. The gap between incomes and the rents index is reaching new highs while consumer prices are set to leap in price as well. Something has to give, and it will be reflected in an even weaker GBP.

london rents 030717