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 medium-term. Pullbacks are to be expected and may provide good long opportunities.

GBP Update:

Interest Rate

Official Bank Rate: 0.50%

Last Change: March 5, 2009 (1.00%)

Expected Future Change: Increase (Q2 2016)

Next Release: September 10

Inflation

Inflation Target: 2%

Period: Year ending July 31, 2015

CPI: 0.1%

Core CPI: 1.2%

Next Release: September 16

Employment

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

Claimant Count Change: -4,900 Expected: 1,500

Unemployment Rate: 5.6% Expected: 5.6%

Average Weekly Earnings: 2.4% Expected: 2.8%

Next Release: September 17

Growth

Period: Year ending June 30, 2015

Second Estimate GDP: 2.6% Expected: 2.6%

Next Release (Final): September 30

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. However recent signals of a slowdown in China, such as the yuan devaluation, have increased concerns that global demand will continue wane. This lack of demand is pressuring commodities prices, namely oil, which in turn dampens inflation expectations. Just like the Fed, the BOE need to be confident about inflation moving up towards their 2% target before raising rates. The Bank will likely need to wait for the effects of the recent further leg lower in oil to pass through before inflation heads sustainably higher. This means that until the oil price stabilises, interest rate hikes will not be a near-term issue. The pound has seen some weakness as price re-adjusts to the prospect of lower oil and longer near-zero inflation. However now that this pullback has materialised, any hawkishness from the BOE will likely set up excellent long entries.

On August 6 we saw several simultaneous high impact releases from the BOE, which were overall negative for the pound. The MPC minutes showed only one member – McCafferty – voted to increase the official bank rate. This was less than the market expectation of two, potentially three, members voting for a hike. Less votes for a hike than expected saw immediate downside in sterling. The content of the minutes also weighed on pound as the MPC said “near-term outlook for inflation is muted. The falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year.” The Bank expects inflation to remain near zero for at least two more months. The committee revised down its forecast for CPI inflation over the next 12 months and still expects it to only just return to the 2% target at the two-year policy horizon. Most MPC members see the market expectations for interest rates to start rising in spring 2016 as broadly correct. The BOE cited low oil prices and a stronger pound as creating downside risks for inflation. “The most important single reason for below-target annual inflation is the sharp drop in energy prices during the second half of last year.” Carney wrote in a letter to Osborne.

The Quarterly Inflation Report, also released on August 6, gave slight upward revisions to the growth outlook, but also suggested that the rapid job growth of late may slow down. “The pace at which unemployment can fall further is likely to be somewhat slower than in the past few years.” Despite this, the employment forecasts since May were revised higher. Inflation was the key drawback in both the QIR and minutes, as inflation is expected to remain near zero for several more months.

CPI for the year ending July 31 showed that consumer prices ticked up 0.1% for the 12-month period. More positively, y/y core inflation rose increased to 1.2%, up from 0.8% the year ending June. This beat economists’ expectations. The BOE have said that they expect headline inflation to remain near zero for the coming months due to the recent fall in the price of oil. Core inflation should be watched carefully in the months ahead, as another decent increase will see the figure tracking towards 2%.

Recent jobs figures came in below expectations for both the claimant count change and average earnings. The figures were only slight misses and there was little market reaction. Average earnings at 2.4% is still a positive sign for the UK labour market.

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 Second Estimate GDP, released on August 28, confirmed the Preliminary reading of 0.7% for the q/q; the 12 months ending June 30 saw the economy expand 2.6%. Although there was no change from the first estimate, the second estimate contained the breakdown of GDP components and showed better than expected increases in Business Investment at 2.9% for the quarter, above the estimates of 1.7%. This is the greatest quarterly increase in Business Investment since Q2 2014. Overall these growth readings are positive for the UK and allow the BOE to remain on track to raise rates in early-to-mid 2016.

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