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Bank of England Surprise sends Pound Sterling Lower

The British Pound was put on the back foot on Thursday, November 07 after two members of the Bank of England’s Monetary Policy Committee unexpectedly voted to cut interest rates at the Bank’s November policy meeting.

Michael Saunders and Jonathan Haskel became the first MPC members to vote for lower interest rates since the Bank last cut rates in August 2016.

The surprise votes suggest the Bank is leaning towards delivering an interest rate cut in the first half of 2020, unless a notable pick up in the UK’s economic trajectory is reflected in the data.

The Pound fell on the news, as currencies tend to fall when their issuing central bank enters an interest rate cutting cycle.

“Sterling was shocked lower by a dovish Bank of England, which voted 7-2 to leave rates on hold. It was a bit of a surprise in that two members voted for an immediate cut – Saunders and Haskell both opting to cut now. This leaves the door open for a cut to come soon, signals the direction of travel and was the first split since the summer of 2018,” says Neil Wilson, Chief Market Analyst at Markets.com.

Saunders and Haskel said their vote to cut interest rates was largely owed to their view that the UK’s jobs market has begun to deteriorate somewhat – while the UK retains an ability to generate wages and employment is at all-time records, the number of vacancies in the economy has shrank dramatically of late.

The drop in vacancies suggests the jobs market could soon deteriorate and cutting interest rates would offer the economy some support under such conditions.

However, for the majority of MPC members, the economy continues to perform along a path that is consistent with keeping interest rates unchanged at 0.75%, at least for now.

“If global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation,” the MPC said in a statement.

But this in itself marks a departure from previous guidance at the Bank, where the expectation was that interest rates would rise in the future, particularly under an orderly Brexit scenario; now the talk is of rates having to be cut.

In short, the Bank has flipped into rate-cutting mode and this should offer some downside to Sterling, at least in the near-term.

The Bank’s MPC will have also noted that their commitment to raising rates in the future puts them out of step with their global peers, an outcome that might disadvantage the UK economy. The U.S. Federal Reserve has been cutting interest rates of late, the European Central Bank has restarted its money printing programme and the Bank of Japan this month signalled it was looking at cutting short-term rates.

“The Bank of England seems to have finally accepted that the world is in an easing cycle and it can’t fight this tide. We can safely say the hawkish bias has gone. Because we are at the start of an election campaign the Bank was never going to vote for a cut today. But had we not been, there could have been more members calling to ease. There is the age-old debate of whether it’s best to go for an insurance cut now to see off weaker growth etc, or to keep the powder dry for when/if it goes completely wrong,” says Wilson.

“The message from the BoE is pointing to the downside for the Pound. Surprising votes for rate cuts voicing concern over domestic & global risks.Given how the UK is such an international economy, this is understandable,” says Neil Jones, head of hedge fund FX sales at Mizuho.

Markets had been anticipating the BoE would not only leave rates unchanged but that it would do so unanimously, which might explain why Sterling tumbled when the decision was published.

Dissent on the MPC brings closer a majority that might be in favour of a rate cut, and markets are not prepared for that to happen any time soon.

The Bank of England also released their Monetary Policy Report today, which contains the Bank’s forecasts for economic growth, inflation and other economic variables.

These in themselves can have an impact on the Pound as it suggests how the Bank sees the economy evolving over time.

“Looking through Brexit-related volatility, underlying UK GDP growth has slowed materially this year and a small margin of excess supply has opened up. That slowdown reflects weaker global growth, driven by trade protectionism, and the domestic impact of Brexit-related uncertainties,” the report noted.

Compared to the earlier forecasts, the Bank has this month forecast end-2019 economic growth to be at 1.0%, up from 0.9% forecast in August.

The end-2020 growth forecast was lowered to 1.6% from 1.8% expected back in August.

Inflation for end-2019 is forecast at 1.4%, down from 1.6% forecast in August, while inflation for end-2020 has been cut from 2.1% to 1.5%.

These inflation forecast cuts are sizeable and will certainly in themselves present to markets a signal that the Bank is no longer looking to raise rates.

Indeed, these inflation expectations suggest the Bank could quite comfortably justify a rate cut over coming months.

The Bank’s forecasts are however conditioned that a Brexit deal, of the kind struck between the UK and EU, is ultimately passed in coming months.

“Reflecting government policy, the MPC’s projections are now conditioned on the assumption that the UK moves to a deep free trade agreement with the EU,” said the Bank in its MPR statement.

“For our economic base case, we expect Prime Minister Boris Johnson and the Conservative Party to win a majority of seats at the election. That should enable an orderly Brexit to happen on 31 January next year. In line with the MPC’s latest guidance, we look for the BoE to hike the Bank Rate in Q3 2020 followed by another hike in 2021, by 0.25bp each time. That would take the bank rate to 1.25% by end-2020. Of course, if the election ends in a hung parliament the BoE would change its tune fast and, could, as signalled in the updated guidance, even cut rates,” says Kallum Pickering, an economist with Berenberg Bank in London.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling slides back to $1.25 as economy and Brexit worries grow

The British pound fell back towards six-month lows against the dollar and the euro on Monday, with traders still nervous about a loss of momentum in the UK economy, the prospect of an interest rate cut and a new prime minister.

At the end of last week, sterling ended a nine-week losing streak against the euro and inched up from a low of $1.2439 hit at the end of June.

However, analysts are largely bearish on the pound after a run of poor economic data and signals from the Bank of England that its next move may be to cut interest rates rather than raise them, as it had previously flagged.

The pound fell 0.5% to $1.2510, while against the euro it declined 0.5% to around 90 pence.

Sterling had hit a six-month low of 90.10 pence per euro last week.

On Tuesday, employment and wage growth data for the month of May will show how the British labour market is holding up. Many economists expect the UK economy will have contracted in the second quarter.

Investors are also waiting for the outcome of the Conservative party leadership contest to replace Prime Minister Theresa May.

Eurosceptic Boris Johnson is the favourite to win against Jeremy Hunt in a vote by Conservative party members. The winner will be crowned leader – and prime minister – by the end of July.

Nomura FX strategist Jordan Rochester said the bank’s analysts had concluded that sterling was “in the value zone for now, vols are cheap and a lot of bad news is priced in, but that’s just for the next six weeks or so”.

“In September, hard Brexit risks will once again be priced in by markets,” he wrote in a research note.

Britain is scheduled to leave the European Union on Oct. 31.

David Madden, analyst at CMC Markets, noted that on a technical basis, sterling/dollar “has been driving lower since mid-March, and if the bearish move continues it might encounter support at $1.2365 region.”

Reporting by Tommy Wilkes; Editing by Jon Boyle and Kevin Liffey

Source: UK Reuters

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Sterling slides towards two-year lows as outlook darkens

The British pound fell towards its lowest levels in more than two years on Tuesday against the backdrop of a worsening economic outlook and rising fears about a no-deal Brexit under a new Prime Minister.

With a key $1.25 level against the dollar giving way in early Asian trade, traders quickly pushed the British currency down half a percent against the dollar to a level not seen since April 2017, barring a flash crash in early January.

The pound also weakened against the euro to a six-month low at 89.95 pence EURGBP=D3 and is on track for a tenth consecutive week of losses against the single currency.

“All the fundamental factors point to a weaker pound and the downward momentum is still intact,” said Lee Hardman, a currency strategist at MUFG in London.

In the latest sign of economic weakness, sales at British retailers rose at their slowest average pace on record over the past year, a survey from the British Retail Consortium showed on Tuesday.

Concerns about the worsening economic outlook in Britain – some analysts expect the economy contracted in the second quarter – encouraged Bank of England Governor Mark Carney to signal last week that the central bank may strike a more dovish tone at its August policy meeting.

The pound was trading 0.5% down versus the dollar at $1.2455 and within striking distance of an April 2017 low below $1.2409. It very briefly hit that low in January this year in chaotic trading during a currency market flash crash.

(For a graphic on ‘Sterling approaching Jan 2019 low of $1.2409’, click here tmsnrt.rs/2YCVA5j)

VOLATILE OUTLOOK
Markets are now pricing in a BoE rate cut over the next 12 months, as central banks around the world adopt an easing bias in the face of economic uncertainty and trade tensions between the United States and China.

Sterling has fallen for several days, its losses compounded by a dollar rallying after analysts scaled back expectations the Federal Reserve would cut interest rates by 50 basis points later this month.

RBC Capital Markets strategist Adam Cole noted that betting markets were now pricing in a 95% chance of eurosceptic Boris Johnson, who some investors fear will push Britain towards a no-deal Brexit, becoming the next leader of the Conservative party and Prime Minister.

“While a significant measure of Brexit risks have already been priced, the pound may still have more of its downside exposed, should the prospect of a no-deal Brexit ramp up meaningfully over the coming months,” said Han Tan, Market Analyst at FXTM.

Those risks are being priced into the currency derivative markets with the spread between three and six-month implied volatility in the pound widening to its highest levels in two months.

Latest headlines on the Brexit front have also pressured the pound lower.

Ireland will step up its preparations for a disorderly Brexit this week given the chances of Britain leaving the European Union without a deal have never been higher, foreign minister Simon Coveney said.

A spat between Britain and the United States following the leak to a British newspaper on Sunday of memos from the British ambassador to Washington also raised concerns.

Option markets also point to more weakness in the pound with only some relatively tiny options amounting to around $400 million struck around the $1.24 levels.

Economic growth data for May, due on Wednesday, will help analysts decide whether the British economy is likely to have shrunk in the second quarter after a series of disappointing business surveys.

Economists polled by Reuters expect the British economy grew 0.3% in May month-on-month, an improvement on the -0.4% in April.

Reporting by Tommy Wilkes and Saikat Chatterjee; editing by Ed Osmond

Source: UK Reuters

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Pound Sterling Dented by Carney Warnings

The British Pound is under pressure in mid-week trade with foreign exchange markets digesting a speech by Bank of England Governor Mark Carney that prompted markets to rapidly raise expectations for an interest rate cut over coming months.

Carney told an audience in Bournemouth late on Tuesday that the “stance of monetary policy is tighter than intended” owing to a disconnect between market expectations of interest rates and the Bank of England’s guidance on where they believe interest rate expectations should actually lie.

Carney’s added that downside risks to the economy have increased recently owing to global trade tensions and markets interpreted the comments as reason to increase expectations for an interest rate cut in coming months.

Currencies tend to fall when their central bank communicates the prospect of future interest rate cuts.

Carney said the global trade tensions have caused a “sea change” in investors’ outlook for the world economy that “suggests a shock to U.S. and Chinese business confidence and investment analogous to what has happened in the UK”.

“The latest actions raise the possibility that trade tensions could be far more pervasive, persistent and damaging than previously expected. The rationales for action are broadening,” he said in the speech.

The key phrase here being “the rationales for action are broadening”: markets quickly ramped up expectations for an interest rate cut at the bank on this comment. Money markets now assign a 57% probability of a 0.25% interest rate cut by the Bank in December, up from 41% ahead of Carney’s speech.

This repricing in expectations sent Sterling lower.

The intervention by the Governor means what had already been a poor day for Sterling just got worse leaving the currency trading near multi-week lows against the Dollar and Euro at the mid-week period.

“Things have gone from bad to worse for the Pound. After being knocked by a poor construction PMI earlier in the day, sterling slumped to hit a new session low moments ago in reaction to a speech by Bank of England Governor Mark Carney,” says Fawad Razaqzada, a Market Analyst with Forex.com. “Carney said the BoE expects economic growth in the second half of the year to be considerably weaker and that it will re-assess Brexit and trade tension in August.”

The speech appears to be a clear move by the Bank of England Governor to massage market expectations towards expecting a more sombre assessment at their next major policy update in August with the view to potentially laying the path to another interest rate cut.

However, we are told by one analyst this particular sell-off in Sterling might not be warranted as some interpreted the Governor’s speech as being more balanced than the market have judged.

“Carney did hint 2-way risks to Bank policy rate (explicitly says need for rate hikes if smooth Brexit). Sure nobody can see smooth Brexit / easing global trade tensions right now but no need to chase UK rates even lower (50% odds of 2019 cut priced). GBP sell-off overreaction,” says Viraj Patel, an analyst with Arkera.

Carney said the Bank of England was working on the assumption that both candidates in the leadership race to replace Prime Minister Theresa May would achieve their stated aim of reaching a deal with the EU.

If that happened, the outlook for Britain’s economy could improve quickly, which is why the Bank has not changed its main message about the outlook for rates: that gradual interest rate rises would be needed in the future.

“In the UK, the combination of the relatively strong initial conditions – including a tight labour market and inflation at target – and the prospect of greater clarity emerging in the near term regarding the UK and EU’s future relationship argues for a focus on the medium-term inflation dynamics,” Carney said.

The British Pound had already been under pressure against the Euro, U.S. Dollar and other major currencies earlier on Tuesday, July 02 as foreign exchange markets continue to express caution over the prospects of a disruptive Brexit and heightened prospects for a General Election before 2019 is out.

Adding downward pressure was a rude surprise in the form of Construction PMI for June that showed the sector has entered its deepest slowdown in ten years: the reading of 43.1 is sharply down on the previous month’s reading of 48.6, and well below analyst expectations for a reading of 49.3 to be delivered.

The data only adds to market concerns that the UK economy is stalling at a critical period for the country’s politic future. The economy has long been a bright spot for the Pound, underpinning it amidst chronic political uncertainties. We wonder what might happen to the currency now that the economy is looking less reliable.

We continue to maintain a view that currency markets are primarily focussed on the Brexit strategies of the two candidates to replace Prime Minister Theresa May in late July, and we hear today that front-runner Boris Johnson will make an offer to the European Union over post-Brexit free trade, but if it rejects that gambit then Britain will leave the bloc without a deal on October 31.

“With Boris, what he’s actually said clearly is: ‘We’re not going to go back and renegotiate’,” Iain Duncan Smith, Johnson’s campaign chairman, told Sky News.

“What we’re going to do is we will put a different offer down and say to them: ‘Look – we want to get to free trade. Now we can either start talking about that now if you are serious and you want to have a process that means we don’t end up … with tariffs etcetera after the 31st – if that’s what you want, the EU, then we are prepared to talk,” Duncan Smith said.

“But if all you are interested in doing is saying: ‘All you can have is this deal’, then the answer is: we will be prepared to leave on the 31st,” says Duncan Smith.

The developments will only further embed growing expectations for a ‘no deal’ into the value of Sterling we believe.

“A hard Brexit or the prospect of a new election is likely to weaken the GBP further, while a controlled withdrawal or a second referendum is likely to reduce the risk premium on the GBP and strengthen it,” says Dr Richard Falkenhäll, Senior Currency Strategist with SEB.

Merkel Will Talk: Hunt
Jeremy Hunt, who is fighting Johnson for the top job, has meanwhile said German Chancellor Angela Merkel will be willing to look at proposals for a revised Brexit deal.

“When you talk to those people … they also say that if a new prime minister comes forward with new proposals that are sensible of course they will look at the package,” Hunt told Sky News. “I have had a conversation with Angela Merkel. (She said) of course we will look at any proposals made by the new UK prime minister, because she wants to solve this problem.”

Hunt’s view on a potential willingness by the EU to look at the proposals of the next Prime Minister does offer some hope that a deal, of sorts can be done.

Of course EU leaders and officials have lined up over recent weeks to say there is only one deal on the table, and that is the current Withdrawal Agreement, and that it cannot be reopened for fresh negotiations.

We do however wonder if apparent EU intransigence on the matter will be permanent when faced with a Prime Minister who decidedly commits to a ‘no deal’ Brexit.

Hunt, who has long been seen as the ‘softer’ of the two candidates on Brexit is meanwhile appearing to harden his stance, saying that unless the EU budge by the end of September he will commit fully to a ‘no deal’ Brexit.

Johnson has long been of the opinion that a ‘no deal’ should be pursued if no improved deal with the EU can be found and has this week sought to downplay the negative impact of a potential ‘no deal’ Brexit.

We remain of the view that foreign exchange markets will continue to place great emphasis on Johnson’s intentions concerning Brexit and the strategy he intends to pursue.

“His “do or die” pledge to leave the EU on the 31st October has heightened ‘No Deal’ Brexit fears. We continue to believe a General Election or second referendum will be required to break the deadlock if parliament votes to prevent a ‘No Deal’ Brexit. We believe there is scope for further Pound weakness heading into the autumn,” says Derek Halpenny, Head of FX Research at MUFG in London.

Johnson said on Monday the impact of leaving the European Union without a deal would be “very, very small”, and added that he had a very carefully costed programme of spending plans.

“There is as you know about 26 billion quids worth of headroom. The money is there,” Johnson told reporters when asked about his spending proposals.

“We also think there is room to make some sensible tax cuts as well and we will be doing that too.”

Analyst sees Further Declines for Sterling against the Euro Ahead
Foreign exchange analyst Trevor Charsley with AFEX – a currency brokerage based in London – says he believes the Pound will continue to “staircase” lower against the Euro for the foreseeable future.

“For now at least the market here can continue to “stair-case” directly lower first/next instead and despite initial buying interest at 1.1100 a window of opportunity thus remains open to examine the psychological 1.1000 in coming sessions, Charsley says in a weekly briefing note to clients.

The Pound-to-Euro exchange rate has been under pressure since early June, when it was quoted as high as 1.17, and is now looking to be stuck in a range below 1.12 with a negative bias being in place.

Pound Shifting Negative Against the Dollar
The Pound has been tracking sideways against the U.S. Dollar since late May: bordered to the top by the 1.2750 area and to the bottom by 1.25-1.2550.

It appears that we are witnessing another impulse lower in the range.

“A closing break below 1.2650 has put a negative bias back into the recent phase of consolidation again,” says Richard Perry, a market analyst with Hantec Markets. “Momentum indicators are drifting lower, with the RSI into the low 40s, Stochastics lower and MACD lines plateauing, but these are more of a negative bias rather than precipitous bearishness.”

“Losing 1.2650 effectively opens the recent low at 1.2505,” adds Perry.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling edges up as UK opposition tries to block no-deal Brexit

The pound rose towards a three-week high on Wednesday after Britain’s main opposition party said it would try to introduce parliamentary legislation to prevent a no-deal Brexit.

Investors are concerned the next prime minister could put Britain on course for a no-deal divorce with the European Union and send the pound plummeting.

Frontrunner Boris Johnson, a eurosceptic, has said he would be willing to take the nation out at the end of October, even if it meant leaving without a deal.

But Labour on Wednesday will debate a motion to seize parliamentary time on June 25 to give lawmakers the chance to introduce legislation preventing a no-deal Brexit.

“With the risk of a new leader with a new mandate behind a (somewhat) more unified Conservative Party, the opposition must make hay with mayhem while they can. By forcing this issue today, candidates must clarify where they stand on Brexit,” said strategist Helen Thomas, of Blonde Money.

A majority of lawmakers oppose leaving without a deal and other leadership contenders have warned parliament will block any attempt to do so.

The pound was up 0.2% at $1.2740, close to a three-week high of $1.2763 hit on Friday. It was flat against the euro at 89 pence

Sterling, which has been confined recently to a range of $1.26-$1.28, found some relief on Tuesday after British wages in the three months to April rose faster than expected.

Traders have largely ignored economic data releases in Britain recently, believing the Bank of England is unlikely to change interest rates until Britain decides how, when and even if it will leave the European Union. The United Kingdom is scheduled to exit the bloc on Oct. 31.

Reporting by Tom Finn; Editing by Andrew Cawthorne

Source: UK Reuters

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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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British Pound Sheds Value on News UK Economy Shrank in April

Pound Sterling reacted negatively to data out Monday that shows the UK economy shrank 0.4% in April 2019 according to the latest set of monthly growth data from the Office for National Statistics.

Markets had been expecting a disappointing reading, although not by this margin, as the estimate by economists was for a decline of 0.1%.

The disappointment corresponded with a fall in the Pound-to-Euro exchange rate from 1.1250 to 1.1225, while the Pound-to-Dollar exchange rate fell from 1.2718 down to 1.2695.

We were not anticipating much of a reaction to the data by Sterling, however it appears the scope of the disappointment could not be ignored by foreign exchange markets.

The ONS report that while the economy shrank 0.4% in April, it grew 0.3% in the three months to April.

“GDP growth showed some weakening across the latest 3 months, with the economy shrinking in the month of April mainly due to a dramatic fall in car production, with uncertainty ahead of the UK’s original EU departure date leading to planned shutdowns,” says Rob Kent-Smith, Head of GDP at the ONS. “There was also widespread weakness across manufacturing in April, as the boost from the early completion of orders ahead of the UK’s original EU departure date has faded.”

Separate data released by the ONS shows the manufacturing sector contracted 3.9% on a month-on-month basis in April, where forecasts had suggested the market was eyeing a shallower decline of -1.1%.

Industrial production meanwhile contracted 2.7% in April where markets were expecting contraction of 0.7%.

The disappointing data heaps further pressure on Sterling which is already struggling under the yoke of political uncertainty with the Conservative Party’s leadership race now fully underway and suggesting that the likely winner will only see success if they are open to courting a ‘no deal’ Brexit.

Pound Dollar

Above: The clear reaction by Sterling against the Dollar to the GDP data release.

GDP and Pound Euro

Above: The clear reaction by Sterling against the Euro to the GDP data release

“Sterling though has clearly been unwilling to completely write off the weakness, perhaps also concerned that the drop in industrial sector output is a sign of some of the disruption that could be to come, if the UK were to face a very disorderly Brexit. Indeed, Sterling has fallen to stand at $1.2685 against the USD, from around $1.2725 before the data,” says Victoria Clarke, an economist with Investec.

Bank of England financial modelling suggests under a ‘no deal’ Brexit there would be a negative hit to the UK economy and a substantial readjustment lower in the value of the Pound.

The economic statistics out Monday will serve as a reminder to currency traders and investors that the UK faces significant economic vulnerabilities over coming months due to ongoing political uncertainty.

Responding to the data, James Smith, Developed Markets Economist at ING Bank, says the slippage in UK economic activity in April “is almost entirely down to a Brexit-related correction in manufacturing.”

The outlook for the economy going forward remains difficult says Smith:

“The wider growth story continues to look fairly bleak. While consumer spending may be a little stronger given the modest improvement in real wage growth, investment is likely to continue falling over the summer as Brexit uncertainty weighs on decision-making.”

Expectations for further uncertainty on the horizon is expected to ensure the Bank of England opts to keep interest rates unchanged for the remainder of the year.

“Rising concerns about a possible ‘no deal’ Brexit, as well as the growing likelihood of a general election in the autumn, make it more likely that the central bank remains on hold through this year,” says Smith.

For Sterling, an interest rate rise – in response to rising wages and inflation – would have offered a rare source of support as currencies tend to rise when their central bank is raising interest rates.

However, it now looks as though the UK’s resilient economy might no longer offer the support the Pound has come to rely on over recent months.

John Hawksworth, Chief Economist at PwC, says the UK should however avoid recession and see modest growth over coming months:

“After a strong first quarter, GDP fell back sharply in April due to planned car factory shutdowns and the reversal of stockbuilding before the original Brexit date.

“Looking through these temporary fluctuations, underlying growth in the UK economy remains modest as Brexit-related uncertainty continues to weigh on business investment. Modest growth seems likely to continue through the summer and autumn, bearing in mind also the drag on business confidence from rising global trade tensions.”

rolling three month GDP growth

PwC reckon robust consumer spending courtesy of continued jobs growth and rising real earnings over the past year, as well as increased government spending, should buoy the economy.

“Balancing these positive and negative effects, we expect UK GDP growth to remain modest, averaging around 0.2% per quarter over the rest of the year,” says Hawksworth.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling set for worst week of 2019 as Brexit talks collapse

Sterling dived to a four-month low on Friday after cross-party Brexit talks collapsed and concern grew about the impact Prime Minister Theresa May’s likely resignation would have on Britain’s EU divorce.

The pound has traded in a narrow range of $1.29-1.32 since Brexit was delayed in late March, but following weeks of talks between May’s Conservatives and the opposition Labour Party that yielded nothing the currency slumped out of its narrow range.

May has agreed to set out a timetable for her departure in early June when parliamentarians are likely to again vote against her thrice-rejected EU withdrawal agreement..

That raises the prospect of a Conservative leadership battle producing a more Eurosceptic British leader who could move Britain towards a no-deal Brexit, the worst case scenario for sterling.

“What we’re seeing is the market pricing in a higher probability of an exit without a deal,” Adam Cole, chief currency strategist at RBC Capital Markets, said, noting the growing risk that the bill would fail to pass and May would depart before parliament goes into recess in late July.

“It looks increasingly likely she will be replaced by a pro-Brexit PM with no election, and that automatically increases the chances of a no-deal Brexit.”

Sterling was down for a tenth consecutive session, touching a four-month low of $1.2733 and falling 0.6% against the euro to 87.61 pence, the lowest since February 15.

It is now set for its worst week since February 2018, and a further fall would make it one of the worst weeks in well over a year.

For a graphic on Sterling set for worst week in months, see – tmsnrt.rs/2WVBGSp

Another outcome could be no Brexit at all — a boon for the pound — or the possibility of a general election and a Labour government in power.

“The market doesn’t like elections at the best of times, and given it has a natural capitalist orientation, it’s not a surprise it worries over this (possible) Labour government,” said Neil Mellor, senior currency strategist at BNY Mellon.

On Thursday, the head of Britain’s National Grid criticised Labour’s plans to re-nationalise energy networks, saying that would increase costs for consumers and might prompt legal challenges.

Next week’s European parliamentary vote is another cause for concern, with Nigel Farage’s Brexit Party on course to pick up 34% of the vote, more than the Conservative and Labour parties combined.

Reporting by Abhinav Ramnarayan, editing by Gareth Jones

Source: UK Reuters

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Pound slides to one-week low as Brexit talks falter

Sterling slumped on Wednesday on signs that Brexit talks between Britain’s government and the main opposition party may soon collapse.

The pound has been falling as negotiations between the Conservative and Labour Parties lumber on with little success and as concerns grow about a challenge to Prime Minister Theresa May’s leadership.

But a suggestion by broadcaster ITV’s political editor that the talks could be pronounced dead later on Wednesday took sterling down another leg.

The pound dropped below $1.31 for the first time in a week, down 0.6 percent on the day. It also hit a six-day low versus the euro of 86.24 pence, again down 0.6 percent on the day.

Volatility in currency markets is currently very low and in recent weeks investors have also curtailed their bets on big swings in the pound.

(Graphic – GBP vol vs others, tmsnrt.rs/2WwASTs)

The government conceded on Tuesday that Britain would take part in European Parliament elections this month, a poll that could deliver more bruising results to both major parties.

“The announcement that the UK will take part in European elections confirms that cross-party Brexit talks aren’t going anywhere fast. This also refocuses attention on a leadership challenge to May. Favour the pound to “$1.2950,” said ING analysts in a note to clients.

Some analysts attribute sterling’s recent tepid performance to major risks that could yank the currency either way.

“To the upside, the probability of no Brexit via a second referendum and vote to remain… has started to edge up again in recent days. The downside is associated with.. the risk of May being replaced as PM which is rising,” said RBC’s chief currency strategist Adam Cole.

May agreed a withdrawal deal with the EU last year, but it was rejected three times by a deeply divided British parliament. That delayed the exit date, a postponement that has weighed on the pound as investors fret about prolonged political uncertainty.

Sterling has traded in a narrow range of $1.28-$1.31 since Britain pushed its scheduled departure from the European Union back from March until Oct. 31. There is still little clarity about when, how, or even if, Brexit will happen.

Investors have been broadly impervious to tepid economic data recently and even relatively hawkish comments from the Bank of England last week failed to jolt the currency.

(Graphic – Trade-weighted sterling since Brexit vote, tmsnrt.rs/2hwV9Hv)

Reporting by Tom Finn and Saikat Chaterjee; Editing by Kirsten Donovan and Alexandra Hudson

Source: UK Reuters

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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