Last week it was reported that the UK Manufacturing Industry is currently performing at a 2-year high with a score of 54.6, this was followed by the news that the British Construction Industry posted a 3-year high PMI score of 57.0 and the tripartite of outlandishly high scores was completed yesterday as the UK Service Sector Purchasing Managers Index came in at a stupendous 6-year high of 60.2.
In response to the glittering Services print the Pound rallied by around half a cent against the US Dollar, half a cent against the Canadian Dollar, 0.6 cents against the Euro, 0.8 cents against the New Zealand Dollar and 0.6 cents against the Australian Dollar. The latest in the trio of British economic readings had a particularly positive effect on the Pound because Services account for over 70% of UK Gross Domestic Product.
In the first quarter of 2013 the UK economy expanded by 0.3% and in the second quarter GDP accelerated by 0.6%; during this time the Service Sector PMI improved steadily each month from 51.8 to 56.9. The latest score of 60.2, especially when matched with the rampant Manufacturing and Construction readings, points towards further economic growth in the third quarter, which could ease some pressure on the Bank of England to implement additional monetary loosening measures.
Although the Pound has traded broadly higher against the majority of its currency peers so far this week, Sterling’s performance would almost definitely have been more prolific if traders were not treading cautiously ahead of the Bank of England’s Quarterly Inflation report tomorrow morning. Since his appointment at the helm of the Bank of England, Governor Mark Carney has repeatedly voiced a desire to steer the British economy out of stormy waters towards exit velocity.
The ultra-low 0.50% interest rates that Carney inherited have helped to boost lending and the government’s Help to Buy scheme has had an instant impact on the UK housing market. However, in order to ensure that this momentum is not lost Carney is keen to give investors a guarantee that cheap credit will remain in place for a prolonged period of time. It is widely believed that the BoE will introduce either a nominal GDP target or an improved Unemployment Rate objective, which will act as a threshold for ultra-low interest rates. The problem with this tactic, in terms of the Pound’s value, is that it means a prolonged period of low yields for holders of the Sterling currency.
There are counter-arguments positing that Carney will not get the support he needs from the 9-man Monetary Policy Committee to introduce an explicit threshold, as many BoE policymakers have previously commented that specific targets can hinder the Central Bank’s flexibility with regards to future developments in the British economy.
Essentially, the recent stream of impressive UK economic indicators will mean very little to speculative investors if the Bank of England announces any new quantitative easing measures at Wednesday morning’s meeting. It remains to be seen how market-players will react to a reachable GDP or employment threshold. And it is likely that Sterling could fall out of favour with traders if the BoE opts to target a performance level that is deemed unattainable in the near-term.
With the New Zealand Dollar weighed down by dairy bacteria problems, the Canadian Dollar stuck in limbo between bets whether the Fed will taper asset purchases or not and the Australian Dollar suffering from a dovish Central Bank, it is GBP/USD and GBP/EUR that should prove most interesting to watch.
The Pound to Euro exchange rate is more than two standard deviations below its historic mean, according to Citigroup, indicating that GBP/EUR has room to appreciate if it is given the chance. However, GBP/USD remains susceptible to Fed taper bets and even if Sterling does rally versus the Dollar there is always the possibility of a reversal when the US Central Bank slows down its QE3 programme.
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