GBP Analysis – 1st of June

As long as the BoE maintain their conviction to raise rates circa 2017, GBP will be fundamentally a long-term bullish currency however this will remain largely irrelevant until the June 23 referendum has passed, as polls drive short-term direction.

GBP Analysis

Interest Rate

Official Bank Rate: 0.50%

Last Change: March 5, 2009 (1.00%)

Expected Future Change: Increase (2017)

Next Release: June 16

Inflation

Inflation Target: 2%

Period: Year ending April 30

CPI: 0.30% Prior: 0.50%

Core CPI: 1.20% Prior: 1.50%

Next Release: June 14

Employment

Period: April (CCC), March (UR, AWE)

Claimant Count Change: -2,400 Expected: 4,300

Unemployment Rate: 5.1% Expected: 5.1%

Average Weekly Earnings 3m/yy: 2.0% Expected: 1.7%

Next Release: June 15

Growth

Period: Q1

Second Estimate GDP: 0.4% Expected: 0.4%

Next Release (Final Estimate): June 30

 

Cable fell over 400 pips during the first half of May, before paring the entire decline during the second half as Brexit polls continue to show increasing favour for a ‘stay’ outcome. The latest Ipsos MORI poll gave an 18 point lead to the ‘In’ campaign, and the latest ORB poll gave a 13 point lead to the ‘In’ campaign. On both occasions cable rallied over 200 pips, eventually breaking above 1.47, however falling short of 2016 highs at 1.4770, before once again declining to 1.46.

Core CPI was flat for the month of April, however declined to 1.2% y/y, from a prior of 1.5% and below expectations of 1.4%. Headline CPI rose a mere 0.3% in the 12 months ending April 30. Despite this miss, downside in GBP was limited as the much of decline in prices was associated with a mean reversion after an increase in demand for flights and general consumption during Easter which inflated the prior month’s readings.

On May 12, the market was anticipating a potentially cautious communication from the BoE, given the wide range of views on how much of an impact the upcoming referendum is having on the UK economy. The BoE’s 9 MPC members all voted to keep rates on hold at 0.5%. The Monetary Policy Statement reaffirmed that core inflation remains subdued and noted that uncertainty regarding the EU referendum has begun to weigh on economic activity, with the referendum being the greatest risk to their forecast. However, the BoE, and Carney during his press conference, failed to make any overtly dovish remarks, stating that their base case is for the UK to remain in the EU and that economic activity should be boosted as the uncertainty produced from the referendum dissipates following a ‘stay’ outcome. GBP rallied after the press conference due to this. The rally was however short-lived.

The Inflation Report, also released May 12, saw forecasts relatively unchanged from February, but marginally lowered growth for 2016 and 2017. The MPC expects to hit its inflation target in mid-2018.

Released May 18, Claimant Count Change for April saw 2,400 people leave benefits, compared to expectations for an actual increase of 4,300 people, this was however accompanied with last months 6,700 claimants being increased to 14,700, slightly taking the shine off of this months positive figure. The Unemployment rate for March remained unchanged at 5.1% as expected, along with Average Weekly Earnings increasing by 2.0%, above expectations of 1.7%, and last months 1.8% being revised upwards to 1.9%. As an underlying measure of inflation, Average Weekly Earnings will remain an influential figure in regards to expectations and timing of rate hikes by the BoE.

Second Estimate GDP, released May 26, printed unchanged as expected at 0.4% q/q, however GDP y/y printed at 2.0% versus expectations of remaining unchanged at 2.1%. The slight slowdown was largely due to a 0.4% reduction in production, a 1% decline in construction, and business investment declining by 0.4% y/y and 0.5% q/q. Services however which accounts for 79% of GDP increased by 0.6%, marking the 13th consecutive quarter of growth.

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Source:: GBP Analysis – 1st of June

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