GBP Update 18th of December

In the short term the GBP has the potential to weaken further as the market reprices BOE expectations. Read through my GBP update bellow to familiarize with the latest changes.

The BOE still plans to hike rates in late 2016 or early 2017, and this gives the currency strength fundamentally, however, just as with the Fed, the BOE cannot hike rates until they see inflation moving higher, towards the 2% target. Until this occurs, rate hikes will continue to be delayed. Given the UK’s low inflation and Core CPI sitting only slightly above 1%, combined with the dovish MPC and the market pushing back expectations of a rate increase, we see GBP as a weak bullish currency rather than a wholly bullish one. This will remain the case until we see a noticeable move higher in CPI, or a strong upwards trend in average earnings.

Interest Rate

Official Bank Rate: 0.50%

Last Change: March 5, 2009 (1.00%)

Expected Future Change: Increase (early 2017)

Next Release: January 14

Inflation

Inflation Target: 2%

Period: Year ending November 30

CPI: 0.10% Prior: -0.10%

Core CPI: 1.20% Prior: 1.10%

Next Release: January 19

Employment

Period: November (CCC), October (UR, AWE)

Claimant Count Change: 3,900 Expected: 1,500

Unemployment Rate: 5.2% Expected: 5.3%

Average Weekly Earnings 3m: 2.4% Expected: 2.5%

Next Release: January 20

Growth

Period: Q3 y/y

Second Estimate GDP: 2.3% Expected: 2.3%

Next Release (Final Q3): December 23

Analysis

On December 10, the Monetary Policy Summary showed no change in votes from 8-1 in favour of leaving the Official Bank Rate at 0.50%, and unanimous to keep the stock of purchased assets financed by the issuance of central bank reserves at £375 billion. CPI is expected to remain below 1% until the second half of 2016, core inflation remains subdued and the risks are to the downside for the forecast of reaching target inflation in two-years. Despite lower unemployment, nominal pay growth appears to have flattened off recently. Due to these dovish additions to the minutes, the pound sold off post-release.

The most recent jobs report, released on December 16, saw Average Earnings fall to 2.4%, below the expected 2.5%, and mark the lowest level of wage growth since March. The ex-bonus figure dropped to 2.0% below expected 2.3%. This confirms the BOE’s suspicions that wage growth had been flattening of late. This adds to arguments that rates will not be raised during 2016. Additionally, 3,900 people joined unemployment benefits, above the expected 1,500. A silver lining however was the International Labour Organization unemployment rate which ticked down to 5.2% – the best level since 2008.

CPI for November, released December 15, came in in-line for year-over-year readings at 0.10% headline and 1.20% core. On the month, CPI was flat for both the headline and core readings. Although annual inflation had moved out of deflationary territory, subdued inflation is the key issue preventing the BOE from raising rates. The bank does not expect headline inflation to exceed 1% until at least the second half of 2016.

On November 27, Gross Domestic Product for the third quarter showed the economy expanded an unrevised 0.5%. Annual growth similarly matched its first estimate at 2.3%. However, there were some concerning factors within the GDP expenditure components. The buoyancy of final domestic demand failed to prevent a surge in inventories which alone added a full percentage point to the quarterly change in total output. The other big concern was foreign trade. While exports rose 0.9%, imports climbed 5.5% which was their largest quarterly increase since Q1 2006, seeing net exports subtract 1.5 percentage points from quarterly growth. The lack of balance to the UK economy could pose a problem for policy makers moving forward. With a global slowdown in place and no inflation, it is starting to look like Sterling depreciation to boost competitiveness in exports and give a lift to domestic prices may be the policy route to follow.

P.S. This is my last blog post for this year. I will be back with fresh Forex market insights on the 4th of January 2016. Happy Holidays!

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Source:: GBP Update 18th of December

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