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What to expect from Bank of England’s interest rate decision

The Bank of England (BoE) is set to leave interest rates unchanged this week but will likely try to convince investors rate hikes are around the corner.

The BoE will on Thursday publish the minutes of the latest Monetary Policy Committee (MPC) meeting and the committee’s decision on interest rates. Analysts think the MPC will vote unanimously to kept the benchmark bank borrowing rate unchanged at 0.75%.

“We expect unchanged policy and for the minutes to maintain the current rhetoric of a gradual path of rate hikes,” Barclays’ senior UK economist Sree Kochugovindan said in a note sent to clients last Friday.

The Bank of England has repeatedly signalled that it wants to gradually raise the benchmark interest rate, which remains at a historic low. But economists, analysts, and investors think hikes are unlikely as long as Brexit remains unresolved and the UK’s economy remains lukewarm at best. Market prices indicate investors believe a rate cut is more likely than a hike.

As a result, Bank of England governor Mark Carney and his colleagues will have to signal in the MPC minutes and Thursday’s press conference that they do actually plan to hike rates if they don’t want markets to get a shock.

“We do not expect the BoE to move interest rates higher unless or until there is some positive resolution to the Brexit saga,” Nomura’s George Buckley wrote in a note to clients last week.

As well as Brexit uncertainty, Credit Suisse said economic “risks have turned to the downside” since the MPC’s last meeting. The investment bank cited recent worsening UK manufacturing data, as well as ongoing trade tensions between the US and China, both of which could hit economic growth. Barclays last week cut its forecast for UK GDP growth in 2019 from 1.2% to 1.1% on similar concerns.

Against this backdrop, the central bank looks more likely to cut rates than to raise them. Lower interest rates should help boost growth by encouraging borrowing and spending.

However, the Bank of England has consistently said it wants to gradually raise interest rates — not cut them further. Carney has even suggested he could raise rates if there is a no-deal Brexit, counter to conventional logic.

In order to keep this path open, the BoE will have to prepare the market for future hikes. It will likely do so by sounding a “hawkish” tone in the public comments of the committee. (In central banking, “doves” favour low interest rate policy, while “hawks” favour higher interest rates.)

“The MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a note to clients.

“But with clearer signs emerging that domestic price pressures are building, we expect the Committee to reiterate its commitment to ‘ongoing’ tightening and to repeat its May warning that markets’ expectations are out of line with reality.“

Even if Carney and his colleagues do strike a more “hawkish” tone, investors may remain out of step with the bank.

“Markets are pricing out any prospect of a rate hike from the BoE this year (amid a Fed-led collapse in global rate expectations),” Michael Ingram, the chief market analyst at WH Ireland, told Yahoo Finance UK. “So they can try and sound hawkish, but the market ain’t buying it.”

The Bank of England’s decision will come a day after the US Federal Reserve makes its latest call on interest rates. Investors believe the Fed will signal rate cuts later this year. This loosening of policy may undermine the BoE’s attempts to threaten future rate rises.

Aside from the tone of comments from MPC members, investors will be watching the balance of voting on the nine-member committee closely. If even one member dissents, it could send shockwaves through the market as investors shift bets towards a rate hike later this year.

“A couple of hawkish comments from Haldane and Saunders have made that meeting a little more interesting than it might have been,” Allan Monks, JPMorgan’s UK economist, said in a note to clients.

“But we expect there will be no dissents at next week’s meeting, with the BoE instead using its communications to push back against current market expectations for cuts.”

By Oscar Williams-Grut

Source: Yahoo Finance UK

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Pound Recovers After Wages Grow at Fastest Pace since 2008

  • Pound Sterling bid higher on better-than-expected labour market data
  • Annual wage growth hits highest level since financial crisis
  • Bets growing again that Bank of England to raise interest rates before year-end

Pound Sterling was seen staging a recovery against the Euro and U.S. Dollar in mid-morning trade on Tuesday, June 11 after UK labour market data showed wages continue to rise.

According to ONS data, average earnings, with bonuses included, grew 3.1% in April, which was faster than the 2.9% growth markets were expecting.

The average earnings rate, without bonuses included, grew 3.4% in April, taking the year-on-year growth rate to 3.8%, its highest growth rate since 2008.

With inflation standing at 2.1%, UK consumers find themselves in a position where pay is easily outstripping price increases.

“Sterling jumps above $1.27 and the only G10 currency in green against the U.S. Dollar after April’s nominal wage growth increases a whopping 3.8%, the fastest one-month increase since May 2008 (excluding bonuses),” says Simon Harvey, FX analyst at Monex Europe.

The beat on expectations saw the Pound catch a bid as markets reckoned the data keeps alive the prospect of a Bank of England interest rate rise being delivered before 2019 is out.

Pound vs. Euro labour market data release

Above: Sterling goes higher against the Euro following the release of UK labour market data.

Also proving supportive to Sterling was additional data that showed UK employment grew 32K in the three months to April, where markets were actually expecting employment to have contracted by 1K, ensuring the UK employment rate was estimated at 76.1%, higher than a year earlier (75.6%) and the joint-highest on record. The employment rate for women was 72.0%, the highest on record.

“The British labour market remains rather resilient and provides little cause for concern, as the unemployment rate continues to be unchanged at a very low level. Given that average earnings have improved steadily, we expect a slightly optimistic BoE in the near future,” says Marc-André Fongern, Head of FX Research at MAF Global Forex.

The Pound-to-Euro exchange rate is quoted at 1.1223 in the wake of the numbers, having been as low as 1.1193 earlier in the day. The Pound-to-Dollar exchange rate is quoted at 1.2709 having been as low as 1.2669. The data will come as a relief to the UK currency which remains has been caught in a relentless downtrend since early May, and we would expect any strength to be short-lived in nature as markets remain primarily focussed on UK political dynamics.

“Cutting through the political noise that dominates the column inches currently, sterling received a boost from another decent wage inflation release this morning. As I have suggested before, it was lagging earnings data which stayed the hands of the MPC previously when CPI was testing above 3%. Since this has flipped, and with headline inflation still remaining around target levels, it could be the wage data that tip’s the BoE towards a rate hike sooner than people realise,” says John Goldie, FX Dealer at Argentex, a foreign exchange brokerage.

The employment data suggests the Bank of England could raise interest rates sooner than financial markets expect. The data comes in the wake of BoE policymaker Michael Saunders comments made on Monday that the Bank would not necessarily wait until all Brexit uncertainties were resolved before raising interest rates again.

At a time when the U.S. Federal Reserve and European Central Bank are looking at potentially cutting interest rates, this stance should provide a supportive dynamic for Sterling against the Dollar and Euro.

Financial market pricing of future interest rates appear to betray an assumption that the BoE is more likely to cut rates than to raise them over the coming year, reflecting signs that trade conflict between the United States and China is hurting the world economy.

However, some analysts point out that the UK is not as exposed to international trade dynamics as the U.S. and Eurozone, and therefore the reasons for the Fed and ECB cutting interest rates do not necessarily translate into a ‘sympathy’ cut at the BoE.

If markets row back on their expectations for a BoE rate cut and align them once more with the view that a 2019 rate rise is likely, then we could well see Sterling find further support.

“This is a strong labour market report that bolsters the case of MPC members Andy Haldane and Michael Saunders who recently have re-emphasised the need for gradual increases in interest rates,” says Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics. “With the labour market unlikely to weaken suddenly soon and government policies set to remain supportive of faster wage growth, the MPC can’t afford to ignore the constant inflation pressure now emitted by the labour market.”

Wage data dymamics

Image courtesy of Capital Economics.

Text-book central banking rules state that interest rates must rise in order to keep inflation at a sustainable level, and one of the main drivers of inflation is wage growth.

A typical side effect of interest rate rises is a stronger currency as global investors channcel capital to where returns are expected to be higher.

Commenting on the future of UK interest rates in a speech hosted by the Institute of Directors at Southampton’s Solent University, the BoE’s Saunders said, “we probably would have to return to something like a neutral stance earlier than markets project… I want to stress that the MPC does not necessarily have to keep rates on hold until all Brexit uncertainties are resolved.”

Indeed, the BoE has raised rates twice since Britain voted to leave the EU, in November 2017 and August 2018.

Saunders says the ‘neutral’ interest rate is at about 2.0%, suggesting the UK can absorb a number of interest rate rises.

Andy Haldane, the BoE’s chief economist, meanwhile said in an opinion piece in Saturday’s edition of the Sun newspaper that the time was nearing “when a small rise in rates would be prudent to nip any inflationary risks in the bud”.

Other analysts are more circumspect on the latest set of labour data, suggesting that wage growth will moderate over coming months and this could ease back on expectations for an interest rate rise.

“The pick-up in core earnings seems driven by temporary drivers, such as a one-off public sector pay band increase and a pick-up in whole economy hours worked rather than actual hourly earnings growth. We believe the pace of earnings growth is likely to slow and stabilise over the coming months,” says Fabrice Montagné, an analyst with Barclays.

Barclays expect the recent slowdown in UK growth, as evidenced by Monday’s GDP data, to translate into weaker labour market dynamics.

“Recruitment agents continue to signal that permanent job placements declined steadily between March and May, implying risks to employment ahead (Figure 4). Meanwhile, vacancy growth in May slowed further, and the hiring of temporary workers continued to outpace that of permanent staff, providing further evidence that job creation remains temporary given the uncertain backdrop,” says Montagné.

Written by Gary Howes

Source: Pound Sterling Live

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Pound gains on dollar as Carney says interest rate hikes still on table

BANK of England governor Mark Carney helped keep the pound above 1.27 dollars for a third day running on Thursday, as he said interest rate hikes were still on the table.

The pound was higher against the US dollar, climbing 0.11% to 1.270, following Mr Carney’s comments in the bank’s annual report.

Fiona Cincotta, senior market analyst at City Index, said: “Today’s weaker dollar was lending a hand to the pound, as did Mark Carney. The BoE Governor suggesting that the UK could still raise rates if the economy performs as expected was some welcome good news for the Brexit battered pound.”

But sterling was 0.45% lower against the euro at 1.125 as the common currency surged, boosted by a more positive than expected statement from the European Central Bank (ECB).

This impacted European markets, with the German Dax going into the close 0.23% lower while the French Cac was down 0.36%.

In London, the FTSE 100 was up by 39.63 points, or 0.55%, at 7,259.85.

Under-pressure city heavyweight Neil Woodford was dealt another major blow after St James’s Place ended its £3.5 billion association with his firm.

Shares in the FTSE 100 asset manager were down 5p to 1,037p.

Insurance giant Aviva announced plans to axe around 1,800 jobs in the next three years in a bid to save £300 million a year.

Investors reacted positively to the news, pushing shares up 3p to 413.6p.

Online car seller and trading platform Auto Trader continued its impressive growth with rising revenue and profit despite falling car sales throughout the sector, the company revealed.

Shares dipped 2.4p to close at 585p.

Go-Ahead, the transport company behind Govia Thameslink Railway (GTR), revealed strong growth across all three of its divisions.

Its shares surged on the news, jumping 197p to 2,080p.

Facilities management provider Mitie posted a better-than-expected 6% rise in annual underlying earnings to £88.2 million for the year to March 31.

Shares rose 7p to 146.5p, as the result came in higher than feared after Mitie had warned over earnings and falling orders in March.

Entertainment One shares soared after the Peppa Pig maker denied reports that its president is set to leave the firm.

Shares spiked by almost 16%, climbing 55.4p to 405.4p, after the TV and film production business reassured investors that Mark Gordon, president and chief content officer, will remain at the firm.

Engine maker Rolls-Royce announced it had offloaded a £4.6 billion chunk of its pension scheme covering 33,000 members to Legal & General, in the biggest deal of its kind in the UK.

Shares were up 11p at 894p.

Oil prices were little changed, having slumped in the previous session when the Energy Information Administration update showed that US oil stockpiles have significantly jumped.

A barrel of Brent Crude oil was trading at $60.46, down 0.13%.

The biggest risers on the FTSE 100 were Imperial Brands up 112p to 2,073p, British American Tobacco up 87p to 2,915.5p, United Utilities Group up 22.4p to 829.6p and Severn Trent up 47p to 2,046p.

The biggest fallers on the FTSE 100 were Taylor Wimpey down 12.65p to 156.5p, Kingfisher down 10.5p to 207.6p, Hargreaves Lansdown down 81.5p to 1,900p and Vodafone Group down 5.12p to 127.98p.

Source: Herald Scotland

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May Quitting Throws Bank of England Governor Race Into Unknown

A new prime minister — and the new chancellor of the exchequer that might accompany them — could have very different priorities from May and Philip Hammond, potentially opening the door for a different slate of candidates for the top BOE job. The finance chief is the one formally responsible for making the appointment.

The prime minister’s decision also ups the uncertainty faced by the U.K., which Hammond has previously acknowledged could deter candidates. Potential governors don’t have long to make up their mind. The closing date for applying for the BOE role is June 5 — two days before May will stand down — with a decision due in October. A new prime minister is likely to be in place by the end of July.

“Not only do we not know who’s in the running and who is actually possible, but we also don’t know who is going to be making that choice — or, to be honest, even which party may be making the decision,” said George Buckley, chief U.K. economist at Nomura in London.

If a Brexiteer succeeds May, it could lead to an awkward end to the tenure of Mark Carney, who is set to leave the role in January. In the meantime, the change of leadership leaves the Canadian facing a tricky policy dilemma of whether he should keep preparing the ground for the interest-rate hikes he says are needed while further uncertainty stalks the economy.

Carney has come under frequent criticism from anti-European Union politicians, many of whom consider him to have been overly gloomy on Britain’s prospects. While Hammond has been a more sympathetic ear in the Treasury, the relationship could be more strained if one of Carney’s prominent critics takes the role.

In a Bloomberg TV interview Friday, Roger Bootle, chairman of Capital Economics and a member of pro-Brexit group Economists for Free Trade, said that a new chancellor was almost certain.

“I would be very surprised if any new prime minister stuck with the current one,” he said.

While a Brexiteer PM might add some unexpected names in the race to replace Carney, a more orthodox candidate can’t be ruled out — especially if they are looking for a safer choice to burnish their economic credentials.

Jacob Rees-Mogg, an arch critic of Carney, suggested last year that Andrew Bailey, the chief executive officer of the Financial Conduct Authority, and BOE Chief Economist Andy Haldane — two men regularly cited as potential replacements — could take the job.

If front-runner Boris Johnson prevails, former adviser and pro-Brexit economist Gerard Lyons could be a potential choice for the central bank.

Hammond said the next BOE governor should have international status, prompting speculation that former Reserve Bank of India chief Raghuram Rajan could be in the frame. May, a former BOE economist, has also encouraged women to apply for the role.

Of course, the decision might not even be in the gift of the Conservative Party. If the leader calls a general election to buttress their position, Labour could seize power for the first time in almost a decade. The opposition party has explored proposals to change the BOE’s mandate, including targets for house-price inflation, productivity and climate change.

By David Goodman and Lucy Meakin

Source: Yahoo Finance UK

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Further Brexit delay would hit UK economy – BoE’s Broadbent

Britain’s economy risks damage if Brexit is delayed beyond its latest Oct. 31 deadline because companies would continue to hold back on investment, Bank of England deputy governor Ben Broadbent was quoted as saying on Monday.

“It’s pretty clear that investment has been feeling the consequences of the uncertainty about Brexit and particularly the possibility of a bad outcome,” Broadbent told the Press Association news agency.

“If you continually expect news to arrive imminently – a resolution – then that can have quite a depressing effect on investment,” he said.

By contrast, a Brexit deal would lead to “quite a strong bounce-back in investment.”

Broadbent reiterated the BoE’s guidance that future interest rate increases would be limited and gradual, adding the “emphasis is on the ‘gradual’ bit of limited and gradual.”

He said he did know whether the British central bank would need to increase rates or cut them in the event of a no-deal Brexit shock to the economy.

“I don’t know. I really don’t, because I don’t know how much the exchange rate will move,” he said.

Several other top BoE officials, including Governor Mark Carney, have said a rate cut would probably be needed to help the economy weather the shock of leaving the European Union with no deal.

On whether he will put his name forward as a candidate to succeed Mark Carney as BoE governor, Broadbent said: It’s a big job…I have lots of things to think about before I make that decision.”

Writing by William Schomberg; Editing by Peter Graff

Source: UK Reuters

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BoE’s Saunders does not expect UK rates to rise ‘far or fast’

The Bank of England is unlikely to raise interest rates far or fast, even if the economy picks up following a smooth Brexit, Monetary Policy Committee member Michael Saunders said in an interview published on Thursday.

Business investment would probably strengthen following a smooth Brexit but a series of “cliff edges” could cause it to continue to stagnate, Saunders told the Northern Echo newspaper during a visit to northeast England.

“I would expect interest rates will go a bit higher over time, but it won’t be far or fast,” he said.

A ‘neutral’ level for interest rates, which would neither stimulate nor slow the economy, was probably around 2 percent, compared to 5 percent before the 2008 financial crisis, Saunders added.

The Bank of England last raised interest rates in August, increasing them by a quarter of a percentage point to 0.75 percent. Financial markets see little chance of a rates rising this year while it remains unclear on what terms Britain will leave the European Union.

The BoE has long said interest rate rises will most likely be limited and gradual, but last week Governor Mark Carney said markets had gone too far in assuming rates would rise just once over the next three years.

However, on Tuesday the BoE’s chief economist, Andy Haldane, stressed the ongoing uncertainty over Brexit and said it would be “deeply arrogant” to say markets were wrong about the outlook for interest rates or the economy more broadly.

Saunders, the first BoE policymaker to vote for interest rates to rise last year, said Britain had missed out on two to three years of business investment growth since June 2016’s referendum decision to leave the EU.

A smooth Brexit transition to a trading relationship with the EU that was closer than Canada’s, but more distant than Norway’s, “probably wouldn’t be as bad as many businesses fear,” Saunders said.

“No-deal Brexit would be off the table, business investment would recover a bit, the economy would continue to grow steadily and the jobless rate would probably fall,” he added.

By contrast, a no-deal Brexit would most likely cause sterling to fall and push up inflation, as well as causing business investment to fall further.

“That would be painful,” he said.

Reporting by David Milliken, editing by Andy Bruce; Editing by Toby Chopra

Source: UK Reuters

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BoE’s Haldane: ‘Deeply arrogant’ to assume markets wrong on rates

Policymakers would be “deeply arrogant” to assume financial markets or other forecasters are definitely wrong about the outlook for interest rates or the broader economy, Bank of England chief economist Andy Haldane said on Tuesday.

Last week BoE Governor Mark Carney said investors were underestimating how much interest rates could rise, even as the British central bank kept borrowing costs on hold due to Brexit uncertainty.

Haldane said in a question and answer session after a lecture at the University of Sheffield that due to unusually high economic uncertainty related to Brexit, it was reasonable for others to take a different view on the outlook to the bank.

“I think such is the uncertainty right now – for all sorts of reasons, all sorts of obvious reasons about the future course of the economy, it’s not in anyone’s interests to say the markets are wrong and we are right. That would be deeply arrogant,” he said.

“It’s implausible that anyone has a crystal ball on how the economy will evolve. Last week we gave the Bank of England’s view on the economy, having made some assumptions about, for example, how Brexit might play out. Time will tell whether that view comes to pass,” Haldane added.

Reporting by David Milliken, editing by James Davey

Source: UK Reuters

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Bank of England set to leave interest rates unchanged – but hint at a summer rise

Economists expect the Bank of England to leave the UK interest rate unchanged this week but flag a rate rise later this year.

This week is ‘Super Thursday’ for the Bank of England — the central bank will publish the latest decision of its interest rate-setting Monetary Policy Committee (MPC), the minutes from the MPC’s latest meeting, and the latest inflation report.

Bank governor Mark Carney will also give a press conference after the documents are published at 12pm UK time.

Economists expect the MPC to leave the headline interest rate unchanged at 0.75%.

However, a combination of better-than-expected economic growth, rising inflation risks, and reduced no-deal Brexit risks means forecasters expect the Bank of England to hint that rates could rise later this year.

Better-than-expected growth
“The very strong labour market continues to generate high numbers of jobs and increasingly positive real earnings, and though the MPC will remain patient for now, it may warn that a rate hike is likely to come much sooner than currently priced in unless the labour market starts to lose momentum,” UBS’ John Wraith wrote in a note to clients.

Higher earnings typically lead to inflation as people flush with cash spend the money and push up prices. Raising interest rates is a way to control inflation, by encouraging people to put money into savings accounts rather than spending it.

As well as a strong labour market, global growth is performing better than expected and this could also increase inflationary pressure. February UK GDP came in at 0.2%, compared to forecasts of no growth, while first quarter GDP growth in the US smashed forecasts at 3.2%.

“The MPC cut GDP forecasts for the Eurozone, US, and China in Q1 in the last iteration of its forecasts in February (and cut the US estimate again March),” Wraith wrote. “All now look too low, and are likely to be pushed higher. In addition, financial conditions are noticeably looser, and that will further boost economic prospects.”

The risks of a no-deal Brexit are also receding after the exit date was delayed until the end of October.

“The downside risks to the economic outlook posed by Brexit arguably have eased since February,” Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, wrote in a note to clients.

“Both the U.K. government and E.U. member states have demonstrated that they prefer delaying the U.K.’s departure from the E.U. to enduring the political and economic consequences of no-deal. MPs have shown that an effective majority exists to thwart any future attempts at a no-deal departure.”

Brexit risks have largely kept a lid on rate rises up until now and the receding risks could make it easier for the MPC to act.

Hints at a summer rise
Economists think these factors are not strong enough to force a rates rise this week, but mean Bank of England governor Mark Carney could hint rates will rise later in the year as pressures build.

“While we anticipate a unanimous vote this week, we think there is some scope for Thursday’s Inflation Report and governor Carney’s press conference to be marginally hawkish,” Deutsche Bank economists Sanjay Raja and Oliver Harvey wrote in a note to clients this week.

In central banking, a “hawk” is someone who favours high interest rates, while a “dove” is someone who favours lower interest rates.

Economists and investors watch central banks minutes and press conferences closely for any “hawkish” and “dovish” wording to ensure their portfolios are positioned correctly ahead of any rises. Central bankers also like to flag changes before they happen to prevent any market shocks.

“The MPC needs to ensure it can hike Bank Rate without undue disruption in the second half of this year, if the recent favourable run of economic data continues,” wrote Tombs.

Deutsche Bank is forecasting an August rates rise, while Pantheon Macroeconomics said there is a 50% chance of a rates rise in August. Nomura expects the Bank to hike rates in November.

Financial markets are currently predicting only a 30% chance of interest rates rising this year.

Any interest rate hike is likely to be by 0.25%, taking the headline rate of interest in the UK to 1%.

By Oscar Williams-Grut

Source: Yahoo Finance UK

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British Pound Still too Risky to Buy, Downside Risks vs. Euro and Dollar Still Evident

An analyst at Swiss investment bank UBS suggests investors limit their allocation to UK assets – Pound Sterling included – until the current uncertainty around Brexit clears.

If the suggestion is heeded by investors, Pound Sterling could be in for a slow summer as professionals remain on the sidelines until the official exit day nears in October.

“Literally 100% of the conversations I have had with our clients, especially those based outside of the UK, have been about whether it is time to get back in, back into UK property, stocks and Sterling. But we just need the uncertainty to clear,” says Geoffrey Yu of UBS Wealth Management’s UK Investment Office.

The call by Yu comes as Sterling, like the broader currency market, enters a period of depressed volatility, with the Pound-to-Euro exchange rate seen hovering in the 1.15s and the Pound-to-Dollar exchange rate maintaining a small range around 1.30.

Evidence of the market’s desire to steer clear of Sterling is also apparent in positioning data that shows the market is now neutral after bets against the currency were steadily closed out over recent weeks.

In short, taking a directional bet on the currency is proving a hard ask for uncertain currency traders at present.

Analysts at UBS maintain “a long-term bearish Sterling bias”, noting it is 10% overvalued according to one of their preferred models used to gauge a currency’s valuation.

The suggestion that investors avoid Sterling and other UK assets comes despite strong wage data being released last week which some analysts had taken as a sign the Bank of England (BoE) might be tempted to raise interest rates sooner than previously expected. Typically steadily improving data – particularly wage data and inflation – plays positive for a currency as they signal the need for higher interest rates at that currency’s central bank.

As a rule-of-thumb, currencies tend to rise when central banks raise interest rates, and fall back when they cut.

Many economists however see policymakers leaving interest rates unchanged until the Brexit fog clears.

“Given the current uncertainty around the ‘B-word’ I think the BoE will probably remains on hold,” says Yu in an interview with Bloomberg News.

UK wages raced higher by 3.4%, and 3.5% including bonuses, in March but economists says this does not provide enough cause to expect the BoE to immediately ponder raising interest rates in the current political environment. “The UK labour market remains very tight which should be reflected in a further pick-up in wage growth,” says Elsa Lignos, a foreign exchange strategist with RBC Capital Markets. “The problem is that it cannot translate into expectations of BoE hikes while Brexit uncertainty persists, and so it is hard to make it a positive GBP story.”

Some economists have even suggested the strong wage growth is in fact another symptom of Brexit uncertainty with businesses opting to invest in staff instead of investing in more expensive new equipment. “In a period of acute uncertainty over Brexit, firms chose to invest in people – who remain relatively cheap – rather than make long-term bets on expensive capital, such as new premises, machinery or software,” says Mike Jakeman, senior economist with PwC.

The BoE will therefore arguably be quite content to allow a ‘nice buffer’ of real earnings to exist between inflation and income growth. This will allow the “BoE to probably focus on other things,” says Yu.

Indeed, Sterling barely reacted to the release of strong labour market data on April 16, suggesting the market wants to see a substantial move for the better in UK data before it bids Sterling.

What would have driven the Pound in the past simply doesn’t have the same clout in 2019.

Concerning the Pound’s outlook, UBS are forecasting a lower Sterling against the Euro over coming months with the Pound-to-Euro exchange rate forecast to trade at 1.1236 by year-end.

The Pound-to-Dollar exchange rate is however forecast to trade at 1.35, reflecting a broadly softer Dollar environment.

“Risks of a ‘no deal Brexit’ have subsided and Eurozone political tensions appear contained. We are however still cautious on the GBP as continued uncertainty weighs on the macro outlook and prevents a more meaningful Sterling recovery,” says Vassili Serebriakov, a strategist with UBS.

A Stronger Pound Ahead say Citi Eyeing an August Interest Rate Rise

Once Brexit is resolved, and assuming not by a hard-Brexit, the Pound is at risk of a strong appreciation since UK assets are a ‘buy’ candidate on the basis of raw economic fundamentals.

Analysts at Citibank, the largest foreign exchange dealer in the world, are a little more optimistic and have shifted from a ‘wait-and-see’ on interest rates to envisaging the possibility of a rate hike in one of the five remaining Bank of England meetings this year.

Citi analysts see domestic inflationary pressures rising in the UK, citing strong wage growth driving up prices.

“There are 5 BoE meetings left in 2019. The fresh Brexit extension (to October 31) allows for some breathing space and if UK data holds up, the August meeting might then become more ‘live’ than markets anticipate,” say Citi in a recent client briefing. “A grab-and-go BoE rate hike may be possible in August.”

Pessimistic global growth forecasts had been a major headwind to the outlook for the UK economy but these too have eased since the release of better-than-expected data from China out last week, which showed GDP, retail sales and trade data, all rising strongly, and helped negate hard-landing concerns for the world’s second-largest economy.

The BoE cited the global growth slowdown as a temporary negative factor for the UK economy in its February policy statement.

“Global growth is expected to dip below trend in coming quarters, weighing on UK net trade, before rising to around potential rates. Activity is projected to be supported by the more accommodative monetary policies in all major economic areas that markets now expect,” says the February policy statement from the Bank of England.

If these concerns ease, therefore, the Bank might raise their forecasts.

An improved outlook for global trade as a result of positive reports from negotiations between the U.S. and China has further supported the outlook for global growth, the UK included.

These exogenous factors are likely to support the outlook for Sterling and possibly raise the chances of an earlier BOE rate hike than previously expected.

Currently, the market is discounting only one 25bp hike over the next 3 years, “and will likely look for signals at the May board meeting where the majority of members will probably reject a rate hike, but could send “hawkish” forecasts and a dissenting vote (as a signal for a possible August hike,” say Citi.

Therefore, the view that the market is under-appreciating a rate rise at the Bank of England is a bullish one for Sterling, if proven correct.

Citi are forecasting the Pound-to-Euro exchange rate to trade higher at 1.1765 in three months, and 1.16 in six to twelve months.

They are forecasting the Pound-to-Dollar exchanage rate to trade higher at 1.34 in three months, and 1.37 in six to twelve months.

Source: Pound Sterling Live

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UK wage growth at new decade high as employers hire in the face of Brexit

British workers’ pay grew at its joint fastest pace in over a decade as employers extended their hiring spree, adding to signs that uncertainty about Brexit is prompting firms to take on workers rather than commit to longer-term investments.

Contrasting with other sluggish readings of Britain’s economy, total earnings, including bonuses, rose by an annual 3.5 percent in the three months to February, official data showed, in line with a Reuters poll of economists.

That was the joint highest rate since mid-2008 although in the month of February on its own the pace of wage growth slowed.

Britain’s labor market has defied the approach of Brexit, helping households whose spending drives the economy. Last week, Britain’s exit from the EU was delayed until October.

Employment grew by 179,000 in the three months to February, in line with the Reuters poll forecast, helping to keep the unemployment rate at 3.9 percent, its lowest since early 1975, the Office for National Statistics said.

However, the jobs surge could reflect nervousness among employers about Brexit and risks aggravating Britain’s long-standing productivity problem, the Achilles heel of the world’s fifth-biggest economy.

Workers can be hired and then fired if the economy takes a hit, whereas investment in technology and new machinery — which helps the economy over the long term — fell throughout 2018.


“The elongated period of uncertainty has kept businesses in a hiring cycle,” Tej Parikh, an economist at the Institute of Directors, an employers group, said.

“Without a pick-up in investment, low productivity will also keep wages from growing further, particularly when considering the higher regulatory costs businesses are facing this tax year.”

Data earlier this month showed output-per-hour rose by only 0.5 percent in 2018, well below the annual average of 2 percent before the global financial crisis.

Accountancy firm Deloitte said on Monday that large British-based businesses were increasingly focused on cashflow as they worried about the long-term economic hit from Brexit.

The ONS said the increase in jobs over the past year was all coming from full-time workers, both employees and self-employed.

Average weekly earnings, excluding bonuses, rose by an annual 3.4 percent, the ONS said, in line with the Reuters poll and down from 3.5 percent in the three months to January.

It was the first fall in that measure of pay growth since the middle of last year.

The strength of the labor market is pushing up wages more quickly than the Bank of England has forecast, leading some economists to think it might move quickly to raise interest rates once the Brexit uncertainty lifts.

The BoE forecast in February that wage growth would slow to 3.0 percent by the end of 2019 with the overall economy likely to grow at its slowest pace in a decade.

Writing by William Schomberg; Editing by Peter Graff

Source: UK Reuters