The Pound dipped against the majority of its most-traded currency peers last week as UK economic data printed encouragingly, rather than brilliantly.
Over the past eight months Sterling has surged to fresh multi-month and multi-year highs against the majors due to a free-flowing cascade of outperforming British data releases. This succession of positive results – encompassing rapid falls in Unemployment, sharp rises in Service Sector output, impressive improvements in Manufacturing and Construction, gradual reductions in Consumer Prices and robust readings for Gross Domestic Product – caused investors, swiftly followed by Bank of England officials, to bring forward their forecasts for an interest rate hike.
The Bank initially forecast that rates would rise in 2016, but the rapid acceleration between August and February caused policymakers to revise that number: the BoE now intends to introduce the first rate hike in spring 2015, when it forecasts that the output gap in the UK economy will have closed.
Since February Sterling has struggled to make any further gains versus the majors.
External factors such as a rate hike from the Reserve Bank of New Zealand, a series of QE3 tapers from the Federal Reserve, positive rhetoric from the Reserve Bank of Australia, and a refusal to loosen monetary policy from the European Central Bank, have bolstered demand for the New Zealand Dollar, the US Dollar, the Australian Dollar and the Euro, respectively.
However, the main reason that the Pound’s bullish run has slowed is that rate hike speculation has cooled off. This is because investors and the Bank of England agree that rates will probably start to rise next spring. These forecasts are based on UK data printing positively over the next twelve months. Therefore, GBP pairs have not taken off on data that is merely upbeat because that much is already priced into the market.
Due to the BoE’s latest forward guidance UK ecostats will have to come in significantly better-than-expected to have any real positive impact on demand for Sterling. Data will have to impress in the way that it did last year in order to persuade markets and BoE officials to bring forward their hike projections again. The output gap needs to close more quickly than currently estimated.
Yesterday UK Retail Sales printed more than three times as strongly as analysts had predicted. The monthly reading of 1.7% trashed forecasts of 0.5% and the annual figure of 2.9% trumped estimates of 2.9%. Subsequently the Pound rose to a 3-week high versus the Euro and a 9-day high versus the US Dollar.
This shows that momentum is still building in the British economy and suggests that further upside surprises in domestic data results are entirely possible.
With wages finally rising at the same pace as inflation, on a monthly basis, it is possible that consumer spending will continue to improve throughout 2014. On top of that recent job creation figures in the private sector suggest that employment is rising due to strong demand, which is forcing companies to invest and expand. All of which augurs well for future data prints and rate hike forecasts.
If we are treated to more impressive economic readings, in the mould of yesterday’s Retail Sales report, we are likely to see further appreciations in the Pound.
However, if the recovery does not accelerate, or if it actually begins to slow, then it is difficult to see Sterling making any significant rallies higher.
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