GBP Update – Forex Trading Tips

Today’s calendar is light with some tier 2 data and a speech from Carney during the NY session. We continue to monitor news regarding Greece. I prepared the GBP Update in order to keep you up-to-date with the latest changes in the market.

Fundamental Bias: Bullish

Interest Rate

Official Bank Rate: 0.50%.

Last Change: March 5, 2009 (1.00%).

Expected Future Change: Increase (Q2 2016).

Next Release: July 9.

Inflation

Inflation Target: 2%.

Period: June 1, 2014 – May 31, 2015.

CPI: 0.1%.

Core CPI: 0.9%.

Next Release: July 14.

Employment

Period: April

Claimant Count Change: -6,500 Expected: -12,500

Unemployment Rate: 5.5% Expected: 5.5%

Average Weekly Earnings (Ex-Bonus): 2.7% Expected: 2.5%

Next Release: July 15

Growth

Period: Q2 2014 – Q1 2015

2nd GDP: 2.4% Expected: 2.5%

Next Release (Final GDP): June 30

Summary

  • The market expects the BOE to increase the official bank rate during the first half of 2016.
  • The BOE are watching inflation and employment figures – especially average weekly earnings – to inform their rate hike decisions.
  • The most recent CPI readings, for the four quarters ending May 31, showed inflation has turned positive, after being negative in the prior release.
  • Although the headline figure for employment change came in worse than estimates for April, this miss was overshadowed by the better than expected Average Hourly Earning figure which beat estimates by 0.2%, with the ex-bonus figure at 2.7% which is the highest since 2009. This is positive for the pound as the BOE need to see wage inflation in order to be confident about raising rates.
  • Annual GDP has ticked down during the last 2 years from 3.2% in the four quarters ending Q2 2014 to 2.4% for the period ending Q1 2015.

Analysis

The Bank of England has not changed interest rates since March 5, 2009, but they are now planning for a rate increase within the next 12 months. Barclays has recently brought forward their expectations for a rate hike to Q1 2016, while the majority of analysts expect the first hike to be later in the year.

The April MPC Meeting Minutes caused sustained strength in the pound as it showed that two members – presumably Ian McCafferty and Martin Weale who both voted for a rate rise last year – saw the decision to keep rates on hold as finely balanced. The MPC saw low inflation as a largely temporary phenomenon caused by the significant drop in oil prices. All nine members agreed it was probable that rates would rise over the next three years. The minutes were taken as modestly hawkish. Both the May and the June minutes showed nothing material had changed regarding these views.

In the most recent Quarterly Inflation Report, released May 13, the BOE cut its forecasts for economic growth over the next three years and confirmed it will likely start to raise interest rates in around a year’s time. GDP projections for 2015 were reduced from February estimate of 2.9% to 2.5%. The Bank also cut forecasts for exports, business investment and household spending. During the accompanying press conference Carney added that growth prospects could weaken further if the Greek debt crisis worsens. Collectively the inflation report and press conference prompted selling in sterling.

CPI readings for the annual period ending May 31 showed inflation in the UK returning to positive territory. The year-on-year change in consumer prices increased 0.10%. This reading was positive for GBP, as an upward trend in consumer price levels will give the BOE the confidence to begin a tightening of policy. The annual core reading for the same period printed at 0.9% – still less than half the Bank’s target range for inflation. A continued move higher in inflation will be bullish for the pound as the first rate increase approaches.

Jobs figures for the month of April, released June 17, showed a solid increase in wage inflation, with Average Weekly Earnings (Ex-Bonus) – expressed as a 3-month average compared to the same period a year prior – ticking up to 2.7% from 2.3% in March. Despite the headline Claimant Count again missing estimates, the report was positive for the pound as the BOE are interested in seeing an increase in wages to inform their rate hike decision. GBP saw a sustained rally after this release. Of note is the strong upward trend in wages, with Average Weekly Earnings (Ex-Bonus) rising consistently from 0.7% in June 2014 to the current 2.7% level.

The pound has seen an aggressive rally during the past several weeks. Bullish sentiment began on the pound after the MPC minutes which showed two members close to voting for a rate hike. Since then we have seen three consecutive jobs reports where average earnings has beaten estimates – with the most recent reading for April marking the highest level in over 5 years. The bullish sentiment as been further cemented by several BOE speakers making hawkish remarks – recently Weale told Financial Times that the UK jobs market was “fizzing away nicely” and that wages were rising faster than expected. Correspondingly, the market has edged forward expectations for the first hike to approximately mid-2016, with some analysts seeing the hike as early as Q1.

The combination of the return to positive inflation, stellar wage growth and hawkish comments from BOE members has prompted GBP to rally against all counterparts in recent weeks. Cable traversed over 700 pips since early June, GBPJPY is up over 2,000 pips since mid-April, and GBPNZD up 1,700 pips since early June. The GBP has pulled back slightly from these lofty levels in recent days, however we view such pullbacks as potential opportunities to long GBP. Sterling’s bullish fundamental bias has only strengthened in recent weeks and we predict the currency to remain firm over the coming months. Buying GBP on decent pullbacks against weak currencies such as NZD, JPY and EUR is a sound medium-term trade plan.

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About the Author
Jarratt Davis is the world’s ranked #2 (2008-2013) Forex Trader by Barclays FX Hedge Index, following years of mastering his art as a self employed trader Jarratt has now entered the field of education and delivers the most robust Forex education package on the market. Jarratt’s mentorship is one of the only programs on the market that is conducted by a verified professional trader. Forex Alchemy readers can get the FREE mini course where Jarratt gives away some of his secrets to success by Clicking Here... [space height="20"] [social type="facebook"]www.facebook.com/JarrattDavisForex/[/social] [social type="twitter"]https://twitter.com/jarrattdavis[/social] [social type="google-plus"]https://plus.google.com/+JarrattdavisForexTrader/[/social] [social type="youtube"]https://www.youtube.com/user/JarrattDavisForex[/social]

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