The pound to US dollar rate ended last week on the backfoot, after briefly dipping below the 1.30 level on Friday. Already concerned about the Bank of England’s (BoE) interest rate outlook – which kept the possibility of cutting the cost of borrowing on the table in 2020 – the pair was left to digest the central bank’s second big announcement of the week. Mark Carney’s replacement as the governor of the BoE was revealed on Friday: Andrew Bailey, a BoE stalwart, will step into the role next month, creating further uncertainty about UK interest rates in the months ahead.
Interest rates weren’t the only factor weighing on the GBP vs USD pair. A sudden revival of no-deal Brexit fears, combined with dollar strength, also contributed to its downward spiral from a high of 1.34 on Monday. Boris Johnson’s suggestion earlier in the week that he would prevent the extension of the Brexit transition period, led to concerns that the upcoming negotiations could fail to deliver a comprehensive deal; a scenario that could leave the pound sterling to USD rate balancing on another cliff edge.
US-China Trade Doubts Boost Safe Haven Dollar
The US dollar took comfort in encouraging domestic data, before being boosted by lingering US-China trade uncertainty. Any hint of optimism that the trade war between the two superpowers can be resolved has the potential to make the safe haven dollar unappealing. Therefore, further stagnation in talks about a ‘phase one’ deal can have the opposite effect.
Britain took a huge stride towards leaving the EU when Parliament finally passed the Brexit withdrawal agreement on Friday. Mr Johnson’s reward for achieving such a thumping election majority also included an amendment outlawing an extension to the Brexit transition period. While this could still be revisited in the coming months, the pound will be hoping the UK government favours a soft Brexit agreement over splitting from the EU as soon as possible. The only UK data of note over the Christmas week is Friday’s UK finance mortgage approvals.
Will a raft of ecostats provide the US dollar with some festive cheer? Today sees the release of Durable Goods Orders, Nondefense Capital Goods Orders (excluding aircraft), New Home Sales and the Chicago Fed National Activity Index. On Thursday Initial Jobless Claims figures hit the headlines. Dollar investors will also continue to monitor developments in the US-China trade war, although the Christmas break means they probably shouldn’t hold their breath.
The pound to US dollar interbank exchange rate stands at 1.3273 today. This is -1.74%, or more than -2.25 cents, below sterling’s recent 19-month high against the so-called greenback, its strongest since May 18th 2018, reached on December 12th, at 1.3509.
Sterling has fallen in value against the buck, in part because the UK economy decelerated in December, while America’s economic activity sped up, said trusted statistics released yesterday.
According to watchdog IHS Markit’s “flash” PMIs (Purchasing Managers Indices) for the UK’s services and manufacturing activity this month, the figures fell to 49.0 and 47.4 respectively.
These results were below forecasts for 49.5 for services, and 49.3 for factories, as well as both beneath the 50.0 figure that signals economic growth. This tells us that the UK economy has lost steam, weakening sterling.
US Manufacturing PMI Continues to Expand in December
Meanwhile, looking States-side, IHS Markit’s US services PMI for December rose to 52.2, above both forecasts for 51.9, as well as November’s result of 51.6. Also, US manufacturing activity came in at 52.5 this month, bang on forecasts, and only slightly below November’s 52.6.
This tells us that America’s business activity is both outperforming the UK at present, and in fact accelerating.
This reinforces US Federal Reserve Chairman Jerome Powell’s recent remarks that America’s economy is in a “good place” and cuts the odds that the US central bank will reduce interest rates below their current 1.5%-1.75% in 2020. This tends to support the US dollar.
Looking to this week, there are many factors that could affect the GBP to USD interbank exchange rate. These include the new UK Conservative government’s Brexit and spending plans, which may support the UK economy in 2020. They also include news about the US-Chinese trade war, following President Donald Trump’s recently signing the “first phase” trade deal. They also include economic data, such as today’s UK unemployment figures for October, and the Bank of England’s interest rate decision on Thursday. Meanwhile, US economic releases include today’s industrial production figures for November, and US GDP figures for Q3 on Friday, at 13.30 GMT. So look out for these releases, for their effect on the pound vs US dollar.
The pound against the US dollar (GBPUSD=X) was choppy in the first weekday trading session following an extraordinary session in UK parliament over the weekend that saw prime minister Boris Johnson’s Brexit plans in disarray.
Initially, investor sentiment remained dampened, with cable down by 0.6% and hovering around the $1.29 mark, as traders await to hear when a vote on Johnson’s Brexit deal, which was sealed with the European Union last week, will be held. However, it bounced back into positive territory around 920am UK time.
On Saturday, Members of Parliament (MP) backed a motion to further delay the process of Britain leaving the EU.
Dubbed Super Saturday, UK parliament held its first Saturday session in 37 years. Johnson tried to convince MPs to support his agreement he made with the EU and MPs debated the proposal. Johnson said in a speech “now is the time to get this thing done,” adding that delaying past the Brexit deadline of 31 October would be “corrosive.”
Johnson’s cabinet threatened to postpone a vote on a revised deal if politicians voted to drag out Britain’s exit from the 27-nation bloc, again. However, MPs voted 322 to 306 to back a motion designed to rule out a no-deal exit — which is what will happen if politicians do not agree to Johnson’s new deal with the EU. It was tabled by independent MP Sir Oliver Letwin, which “withholds approval” for Johnson’s Brexit deal until legislation implementing it has been passed.
Subsequently, Johnson was obliged to go to the EU and ask for an extension beyond the 31 October deadline — the second extension in under a year.
Johnson said at the time that he will press on “undaunted” with his Brexit strategy while the EU said it was up to the UK to “inform it of the next steps.” MPs signalled that a vote on Johnson’s revised Brexit agreement could now take place on today — however, this is up to the Speaker of the House of Commons.
However, Johnson caused greater ructions among parliament after he sent three letters to the EU:
An unsigned photocopy of the request for an extension as outlined by the Benn Act and in which he is obliged to give
Another note from the UK’s ambassador to the EU explaining why
A personal, signed letter from Johnson on why he doesn’t want a delay (which is inline with that he has repeatedly said since he became prime minister. He has even said, he would rather be “dead in a ditch” than delay Brexit).
Johnson is now under scrutiny from the law as judges are set to decide whether the unsigned letter sent by Johnson complied with the Benn Act or if the prime minister is in contempt of court. Meanwhile he said parliament must be given “a straight up-and-down vote” on the prime minister’s Brexit deal
“We cannot allow parliament’s letter to lead to parliament’s delay,” he said.
It is now up to Speaker of the House of Commons John Bercow to grant a vote on Johnson’s Brexit deal in parliament.
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.
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.”
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.
The Britsh Pound will rise by more than 5% against the U.S. Dollar next year, according to analysts at Lloyds Bank, as an orderly exit from the EU enables the Bank of England(BoE) to lift its interest rate again just as the Federal Reserve (Fed) brings its own tightening cycle to a close.
Pound Sterling will be volatile until the end of the first-quarter 2019, the bank says, as markets fret over whether Prime Minister Theresa May will be able to pass her Withdrawal Agreement through parliament. However, ratification of the deal early next year is forecast to see the UK exit the EU in an orderly manner.
That should enable markets and the Bank of England to address mounting inflation pressures in the economy, where a falling unemployment rate has been encouraging wage growth for workers. The BoE has already flagged this repeatedly as a likely threat to its 2% inflation target over coming years.
“The BoE has been clear in its guidance, reiterating that, should the economy progress in line with its expectations, a gradual tightening of monetary conditions would be appropriate. There is broad agreement on the MPC that this is consistent with a 25bp rate hike per year over the next three years,” says Gajan Mahadevan, a strategist at Lloyds Bank.
Mahadevan says the BoE will raise the base rate again in August 2019, taking it up to 1%, after PM May is succesful in passing her Withdrawal Agreement through the House of Commons. Meanwhile, the Federal Reserve is expected to ease off on its tightening of monetary policy.
“Among key developed market economies, the US has been the outperformer for some time. Having hit an annualised rate of 4.2% in Q2, GDP growth slowed in Q3 to a still impressive 3.5%,” Mahadevan writes. “However, there are signs that the rises in interest rates over the course of the last few years are starting to take their toll.”
Mahadevan and the Lloyds team say the Federal Reserve will raise interest rates only twice in 2019 as earlier policy tightening takes its toll on the US economy, leading the central bank to bring its multi-year cycle of interest rate hikes to a close. That would mark a turning point for the U.S. Dollar, especially against the Pound.
If the Fed stops raising its interest rate at the same times as markets are becoming willing to bet more confidently on further BoE policy tightening over coming years then it could effectively pull the rug out from beneath the U.S. Dollar.
The Fed raised its interest rate to 2.5% last week, marking its fourth rate hike of 2018, but used its so-called dot plot to signal that it will raise rates on only two occassions next year.
The Dollar index has risen by 5.2% in 2018 after reversing what was once a 4% year-to-date loss wracked up mostly during the first quarter. A superior performance from the U.S. economy was behind the move, because it enabled the Fed to raise rates as economies elsewhere slowed and their respective central banks sat on their hands.
“We expect the currency pair to rally towards 1.35 by June 2019, before settling around 1.33 at year-end. However, the high degree of uncertainty, particularly around the UK’s withdrawal from the EU, means that at this stage our conviction is low,” Mahadevan writes, in a recent note to clients.
Mahadevan’s target of 1.33 for the Pound-to-Dollar rate at the end of 2019 implies a 5.1% increase from Thursday’s 1.2657 level. However, while Sterling may easily recover lost ground from the Dollar before the end of 2019, other analysts have warned that steep losses could be likely before March 2019 comes to a close.
“We will enter 2019 with the most important aspects of the Brexit situation still unresolved. December was an enormously bad month for Theresa May,” says Stephen Gallo, European head of FX strategy at BMO. “To the detriment of the GBP, the remaining Brexit permutations appear to be declining in number.”
Prime Minister Theresa May survived a leadership challenge in December but she still lacks enough support in parliament for her Brexit Withdrawal Agreement to make it onto the statute book.
Analysts and traders have been readying themselves for a seemingly inevitable defeat of the government when the House of Commons gets its “meaningful vote” on the Withdrawal Agreement in January.
Lawmakers on all sides of the House have pledged to vote against the proposals for a variety of reasons and the PM is currently expected to lose the ballot in the Commons.
Approval before March 29, 2019 is key if the UK is to avoid leaving the EU without any preferable arrangements in March 2019 and defaulting to trading with the bloc on WTO terms.
“The first permutation is a “hard Brexit” in which the UK legally exits the EU on March 29th without a deal, forcing the country to revert to WTO rules. We would assign a 45% probability to that outcome at this stage and assume a level of $1.20 in GBPUSD if that comes to pass,” Gallo writes, in a note to clients.
Pound jumps after reports UK and EU negotiators made another breakthrough on the path to Brexit.
The pound has gained more than 1.1% against the dollar on Thursday morning.
It had dropped sharply in the past week after Cabinet resignations over Prime Minister Theresa May’s Withdrawal Agreement.
Prior to Tusk’s comments, an EU official said on Thursday morning that a 20-page declaration had been finalized ahead of an EU summit on Sunday where Prime Minister Theresa May hopes to have the Brexit divorce deal signed off.
The news, which marks another major step forward in the Brexit process, sent the pound flying higher, gaining as much as 1.1% against the dollar, and passing back above the $1.29 mark, which it dropped below a week ago after a series of resignations from the British Cabinet.
Sterling does, however, remain below the level it was trading at when Brexit Secretary Dominic Raab resigned in protest at the deal.
“The reaction itself is more telling than its magnitude. Optimism still remains in the market and sterling’s ability to explode at the blink of an eye is captivating,” Simon Harvey, a market analyst at Monex said in an email.
By 10.40 a.m. GMT (5.40 a.m. ET), it was trading at $1.2910, a gain of 1.15%, as the chart below shows:
The pound has taken off after reports that UK and EU negotiators have made another breakthrough on the path to Brexit.European Council President Donald Tusk said on Thursday morning that a political declaration on the UK and EU’s future relationship “agreed at negotiators’ level and agreed in principle at political level.”
The pound fell to a six-month low against a rallying dollar on Tuesday, while it held its own against a euro dragged down by concerns about a deepening political crisis in Italy.
Sterling has slumped against the dollar since mid-April as expectations of a Bank of England interest rate rise recede and the economy shows signs of prolonged weakness.
Renewed concerns about whether Britain can secure the Brexit deal it wants have also impacted the currency.
Against the dollar, the pound slid as much as 0.7 percent to $1.3205, its weakest since mid-November. The British currency, previously one of the best performers in 2018, is now down more than 2 percent versus the dollar so far this year.
“We can ascribe a lot of it (pound weakness) to the U.S. dollar but I think sterling has been on the back foot independently,” said Jane Foley, an FX strategist at Rabobank, citing relatively downbeat UK retail sales and inflation data published last week.
Investors are only pricing in a one-in-three chance of the Bank of England raising borrowing costs in August, the next time it updates its economic forecasts.
“There is nothing in there to restore confidence in the BoE’s ability to raise rates,” Foley said.
David Madden, an analyst at CMC Markets, said the pound remained “in its downward trend” and pointed to $1.32 as a key target.
Versus the euro, sterling has performed much better, and at GMT 1515 on Tuesday traded up 0.3 percent at 87.12 pence per euro.
Worries about divisions within the British government about whether it wants to remain in a customs union with the European Union after it leaves the EU in March 2019 have undermined sentiment towards the pound ahead of an EU summit in June.
However, the euro’s rapid descent – caused by investors buying into dollars and concerns about political uncertainty in Italy – have underpinned the pound and it remains up versus the single currency in 2018.
Sterling climbed on Monday and held near the day’s highs as risk appetite prompted investors to buy the currency but concerns over progress in Brexit negotiations limited the gains.
“There is plenty of noise out there and while expectations of a UK rate hike is about 70 percent priced in by markets, the outcome of the talks later this month is key,” said Marc Ostwald, a global strategist at ADM Investor Services International in London said.
The pound rose 0.4 percent to $1.3905, broadly in line with gains registered by other currencies against the dollar, but it is still some way below a post-Brexit referendum high of $1.4346 in late January.
Strong U.S. job growth data on Friday was balanced by slower increases in wages, resulting in money market traders sticking to bets that the Federal Reserve would raise interest rates three times this year. This encouraged investors to add bets against the struggling dollar.
Sterling also edged 0.2 percent higher to 88.65 pence to the euro.
Latest positioning data also indicated an undercurrent of nervousness about the British currency, with net long sterling positions slashed to their lowest since early December.
Worries have grown that Britain and EU officials would fall short of securing a transition arrangement at a March 22-23 summit as differences have grown in recent days. Such an outcome would question market expectations of a 25 basis point rate increase by the Bank of England in May.
“We expect euro/sterling to be volatile ahead of the summit due to conflicting headlines we have seen in recent weeks and as such we remain cautious on the British currency’s outlook,” said Morten Helt, a currency strategist at Danske Bank.
Money markets are pricing in a 70 percent probability of another UK rate rise by May, compared with virtually nil in January.
Finance minister Philip Hammond looks set to announce Britain’s smallest budget deficit since 2002 this week but he is still likely to resist calls to loosen his grip on public spending for now.
Although markets were thin yesterday with a lot of market participants opting for another day of festive rest, the pound was happy to run higher, predominantly against the USD. Cable hit a 3 month high yesterday and as of this morning sits about 0.5% away from its highest level since June 24th 2016; the day after the Brexit vote.
Yesterday’s UK manufacturing data showed that the sector continues to chug along at a decent rate buoyed by demand from export markets and domestic intermediate and investment sectors. UK goods are, courtesy of the weakened pound, on a Blue Cross sale at the moment but the news that providers to domestic consumers saw a slowing of demand will harden concerns over the outlook of the British shopper. Inflation within the sector remains at a high level too and we will have to keep a close eye on how much of this can be passed through to the end consumer and how much will have to come out of already stretched margins.
News from the construction sector is due this morning with the services sector reporting on Thursday. .
USD: Buttons and minutes
The dollar has recovered some of its 2018 losses overnight although remains weaker on the year still against the pound, euro, yen and most other major currencies.
Donald Trump is still playing a game of ‘my dad is bigger than your dad’ on Twitter vs Kim Jong Un. Following the North Korea leader’s announcement that the nuclear button “is always on my desk”, Trump tweeted “Will someone from his depleted and food starved regime please inform him that I too have a Nuclear Button, but it is a much bigger & more powerful one than his, and my Button works!”
Tonight’s Fed minutes release is from December’s meeting that saw the Federal Open Markets Committee hike interest rates for the 3rd time in 2017. This meeting and decision had two dissenters on that move although growth expectations had been revised higher thanks to the then expected passage of the Republican tax plan.
Although we are in the early days of 2018, there is very little change in the overall market psychology from the 2nd half of 2017. As a result the age old back and forth of inflation, wages, the impact of the US deficit on costs will be in focus for much longer.
EUR: Stronger sellers when it comes to pricing
News from the overall European manufacturing sector was enough to push EURUSD to within touching distance of its highest level for some near 3 years. Within the manufacturing numbers pricing pressures are tipping back into the hands of sellers as opposed to buyers which is a good thing for those looking for higher inflation and therefore higher interest rates from the European Central Bank in time.
November’s interest rate decision is fast approaching and, with recent data having shown the UK economy at risk of a slowdown, strategists are increasingly divided over what to expect from the Bank of England.
Those hoping for a retreat from earlier warnings over UK interest rates may be left disappointed in the wake of the Bank of England’s November monetary policy announcement.
A solid majority expect the Bank of England to hike rates in November while less than half of strategists expect it to follow through with further policy action in the months after.
“There is an argument doing the rounds that the UK is raising rates so that they can cut them when the ‘inevitable’ Brexit-related collapse happens. Maybe,” says Ben Powell CFA, a multi-asset class content salesperson at Swiss bank UBS.
The bulk of those who do not subscribe to the Brexit collapse view have often cited growing concerns over FX-induced inflation as the motivator behind what is, according to them, likely to be limited policy action.
“At 4.5% UK unemployment is at lows not seen in 5 decades. UK asset prices are booming. In 2016 UK household wealth rose by ~GBP900bn to beyond GBP10Tr for the first time. That ~GBP900bn growth is around 50% of GDP,” says Powell.
But UK economic fundamentals have remained on a sound footing since the Brexit vote in June 2016, despite the prevailing narrative in much of the media and most parts of the financial world.
“UK borrowing has never been cheaper. Outstanding resi mortgages cost 6% 10 years ago and 2.7% now; new lending is at 2.3%. Nearly half of today’s unsecured personal loans cost less than 5%; Sainsbury’s and Tesco’s banking arms are advertising unsecured loans at ~3%, some for up to 10 years in duration,” wrote Jason Napier, an equity research (banks) analyst at UBS.
With the market’s eyes fixed keenly on a deterioration in UK consumer spending that has weighed on economic growth over recent quarters, the “emperor’s well clothed state” has gone unacknowledged by the majority.
“Clearly it’s a matter of judgement, but it may be the case that the Governor thinks supermarkets offering 10 year unsecured loans for ~3% feels a bit punchy. There is also a boom in car financing,” says Powell.
Bank of England governor Mark Carney said in a September speech that UK banks have been extending too much credit to consumers at insufficient rates of interest and that the more “frothy” parts of the market should be addressed.
“This is what the data suggests. And it is what the Governor is telling us he is doing. My sense is that those hoping for a ‘dovish hike’ next week are going to be disappointed,” says Powell.
Pound to Be Left High and Dry Says JPMorgan
The Pound Sterling is at risk of being left high and dry against the Euro and other G10 counterparts over the coming weeks as the interest rate tide that buoyed it through September recedes further.
Bank of England policymakers may not be able to do enough to keep it afloat even if they do vote to hike rates at the November meeting, according to strategists at JPMorgan, who are still betting against the Pound-to-Euro rate.
“Our highest conviction macro trade in recent weeks has been short GBP as we felt that UK rate hikes were overpriced given the weak starting point for UK growth and the existential Brexit shock that continues to dominate the medium-term outlook,” says Daniel Hui, a foreign exchange strategist at JPMorgan.
The foreign exchange team at the US bank say the UK economic backdrop made it difficult enough as it was, in September, to justify embarking on an interest rate hiking cycle but observe that the economy has shown signs of slowing further since then.
“BoE expectations have come under pressure this from a combination of lacklustre growth data releases (annual growth in retails sales is now close to 1% compared to +4% when the BoE eased policy last year) together with a stream of commentary from MPC members that reveals a greater range of opinion about the timing of any monetary tightening,” says Hui, in a note written Friday.
The Pound was buoyed in September when the Bank of England said it begin withdrawing stimulus (hiking rates) over the coming months if inflation strayed further north of its 2% target and the economy remained on a steady footing.
By the end of that month the British currency had posted the strongest performance of all those in the G10 basket as traders rushed to price in a Bank of England hike in November and further action to come in 2018.
“The rate market has belatedly begun to rethink its scenario of a relatively normal rate hike as a result of more equivocal commentary from the BoE and the absence of lift in the growth numbers,” says Hui. “Next week’s 3Q GDP print is expected to confirm the UK as the clear growth laggard within G10, and so maintain the sense of drift in rate expectations and GBP.”
The BoE is expected to raise the bank rate by 25 basis points on November 02 but the number of voices questioning whether this is the right thing to do has grown in recent weeks.
“But it’s important to recognize that a less assertive BoE outlook is not the only factor weighing on GBP, as we interpret GBP’s recent moves as reflecting not only a partial retrenchment of priced hikes, but also the additional leverage of GBP to lack of progress in the Brexit talks and the increased risk of an accidental no deal,” writes Hui.
Hui notes the recent signs of progress in Brexit negotiations but flags that trade and transition talks are unlikely to begin until December at the earliest, the atmosphere around talks may remain uncomfortable for the foreseeable future and risks around sentiment to the Pound will remain high.
The Pound received a boost over the course of Friday and Monday after October’s European Council summit concluded with Brussels sounding a more conciliatory tone on the subject of Brexit negotiations, which revived hopes that “sufficient progress” could soon be made for negotiations to move onto the subjects of trade and transition.
“Our largest net position is long EUR against USD, GBP and CHF. The ECB taper announcement is expected to be marginally constructive for EUR,” says Hui. “But we don’t expect fireworks as the ECB will emphasise dovish forward rate guidance to anchor Bund yields despite what could be a sharp slowdown in the run-rate of asset purchases. EUR upside will be a grind.”
The Pound-to-Euro rate was quoted 0.04% higher against the Euro at 1.1237 during early trading in London Tuesday while Sterling was marked 0.08% higher at 1.3215 against the Dollar.