GBP Update – Forex Trading Tips

The Great British pound is – equally with the USD – the strongest currency out of the eight majors and we expect this bullishness to remain in the near-term.

GBP Update

Interest Rate

Official Bank Rate: 0.50%

Last Change: March 5, 2009 (1.00%)

Expected Future Change: Increase (Q2 2016)

Next Release: August 6

Inflation

Inflation Target: 2%

Period: Year ending June 30, 2015

CPI: 0%

Core CPI: 0.8%

Next Release: August 18

Employment

Period: June (claimant count), May (average earnings, unemployment rate)

Claimant Count Change: 7,000 Expected: -8,800

Unemployment Rate: 5.6% Expected: 5.5%

Average Weekly Earnings: 3.2% Expected: 3.3%

Next Release: August 12

Growth

Period: Year ending June 30, 2015

Preliminary GDP: 2.6% Expected: 2.6%

Next Release (2nd Estimate): August 27

Summary

  • The market and the BOE expect the official bank rate to be raised 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 showed zero price increases in the 12 months ending June 30. This was in line with expectations.
  • The latest jobs figures were worse than expected showing the first rise in unemployment in 2 years. Average earnings however showed the biggest increase in 5 years.
  • Y/Y Final GDP for the first quarter was revised up 0.5% to 2.9% from the prior estimate of 2.4%.

Analysis

The Bank of England are on track to raise in interest rates in the first half of 2016. This will be the first rate hike in 6 years. Overall, data from the UK has been positive and language from BOE members has been hawkish. This adds bullish sentiment to the already fundamentally bullish sterling currency.

At the recent Inflation Report Hearings, held on Tuesday, July 14, Governor Mark Carney stated that “the point at which interest rates may begin to rise is moving closer given the performance of the economy”. This was perceived by the market as extremely hawkish and sterling rallied across the board immediately. Cable spiked over 100 pips in the ten minutes following the comment. Such a clear and direct, hawkish tone from a central bank governor sends a strong message to markets. This comment is likely to set the sentiment for GBP in the sessions to come.

To add to Carney’s comment, we had more hawkish language from the BOE several hours later. Monetary Policy Committee member and soft-hawk, David Miles, stated that waiting too long to start raising rates would be “a bad mistake.” He added that “the time to start normalization is soon”. Such comments may be expected from a hawk but to hear this from one of the more dovish members on the MPC is quite significant. It means that rates will likely rise within 12 months and this is a view held by the majority of BOE. Some major investment banks have noted that the BOE may even raise rates sooner than the market currently expects. In a similar vein, Barclays are forecasting a rate rise in the first quarter of 2016, as opposed to the second quarter as is currently priced in. Language from BOE members has been supportive of the pound in recent sessions and the currency will remain buoyed against most counterparts.

Because the BOE does not release a statement at rate decisions unless there is a change in the bank rate, market participants and analysts must examine Meeting Minutes to gain insight into the Bank’s thinking. The last four MPC Meeting Minutes have been relatively hawkish and supportive of the pound. The minutes for the April 8-9 meeting, released April 22, showed that for two members the decision to vote for rates remaining unchanged was finely balanced. This stance was maintained in the following minutes for May and June. Then in the minutes for the July 7-8 meeting, released, July 22, there were “a number” of policymakers would have found the decision not to raise rates more finely balanced than before had it not been for the uncertainty caused by the Greek debt situation. This strongly indicates the possibility of a change in votes at the next meeting.

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. Collectively the inflation report and press conference prompted selling in sterling due to the reductions in projections.

CPI for the year ending June 30 showed that consumer prices remained flat for the 12 month period. This was largely in line with the Bank’s expectations as they see inflation beginning to slowly rise in coming months from the recent, temporarily deflationary levels. The monthly reading for June also came in flat which was below economists’ consensus of 0.1%. Core inflation for the annual period dropped back to 0.8% from 0.9%, which means the bank are still over 1% away from their target, excluding the effects of lower oil. The BOE have not expressed concern over the current zero inflation levels; coming months are expected to track higher. But, now that wage growth has begun to rise sharply, the aspect of prices inflation is the missing piece of the puzzle before the BOE can commit to rate rises.

The latest jobs figures deserve some careful attention; although all figures came in worse than analysts’ expectations and the pound sold off post-release, there was some strong positive aspects to the reading – in terms of wage inflation. The claimant count was especially poor showing that the number of people claiming unemployment benefits actually increased by 7,000 during the month. This is the first time unemployment has increased in 2 years. Further, the unemployment rate rose to 5.6% from the prior month of 5.5%. Along with this, average earnings missed estimates slightly, coming in at 3.2%. Economist’s expectations aside, this month’s average earnings shows the greatest increase in wage inflation in 5 years – this is resoundingly positive for the UK economy as it shows that employees are beginning to hold more power as employment options increase along with the recovery. It signals that spare capacity in the labour market is diminishing.

Growth in the second quarter of 2015 accelerated compared with the first three months of the year. Q1 Final GDP printed 0.4% while Q2 Preliminary saw 0.7%; the 12 months ending June 30 saw the economy expand 2.6%. This preliminary print, released July 28, was in line with economists’ estimates and therefore allows the BOE to maintain their current plans to hike rates in early-to-mid 2016. The pound saw upside after this release due to rate hike expectations remaining anchored. The Preliminary reading is similar to a flash estimate and the market will be looking toward the Second Estimate released on August 27 to ascertain the breakdown of growth components.

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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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