Fundamental Forecast for British Pound:Neutral
- In the early portion of the week, GBP/USD made an aggressive move towards a multi-month low as UK CPI moved into negative territory.
- But only a day later, GBP/USD rallied back all of those losses and then some, as an upbeat employment report re-energized hopes for an eventual rate hike.
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Last week the Bank of England struck a cautious tone as global growth concerns raised enough red flags for the Monetary Policy Committee to vote 8-1 in favor of keeping rates flat at .5%. Governor of the BoE, Mr. Mark Carney, noted last week that the global economy is a ‘pretty unforgiving environment,’ alluding to the economic slowdown currently permeating throughout Asia and the recent gutting of commodity prices. This had helped to diminish hopes for a rate hike, and we saw the Sterling lose ground against most major currencies excluding the US Dollar (GBP/USD) and the Japanese Yen (GBP/JPY) (which themselves were seeing considerable weakness on the back of global growth concerns).
We saw even more evidence of this slowdown to global growth on Tuesday when inflation for the UK fell into negative territory: Year-over-year CPI for the month of September printed at -.1%, with Core CPI (excluding food and gas) at 1% versus an expectation of 1.1%. Upon this print, the Sterling was offered aggressively against most major currencies, including the dollar and the yen, as those hopes for an earlier-than-expected rate hike diminished even further. In GBP/USD specifically, an outsized reaction was seen off of a confluent resistance level as the pair made a move lower towards multi-month support lows.
But only a day later, all of those losses were erased and then some. A positive employment report out of the UK re-energized hopes for an eventual rate hike, and GBP/USD ripped to new near-term highs after unemployment printed at the lowest level since 2008 at 5.4%. Inside of the report, wage growth came in at 2.8%, which given the deflationary print from the day prior, means that real-UK wage growth is at its highest since any time since the Financial Crisis. This helped to catapult GBP/USD higher as a weak US Dollar continued to see rate-hike-bets get priced out of the market.
And earlier on Friday, we heard again from BoE member Ms. Kristin Forbes as she said that the UK would likely look to hike rates ‘sooner rather than later.’ This is the second time in the past two months that she’s used this phrase, and given the context with which it was delivered, could prove to offer insight into future MPC-policy direction. Ms. Forbes said that while the UK wasn’t likely to be completely immune to a Chinese and Emerging Market slowdown, the British economy’s export exposure was the third lowest of all major advanced nations.
The continued uncertainty around rate trajectory, combined with the mixed bag of data that was seen this week, continues to obscure the near-term picture in the British Pound. For now, the forecast remains neutral. But should inflation begin to show more prominently in the coming months, that forecast can quickly change to bullish, as the Bank of England remains one of the few Central Banks in the free world actually looking at tightening monetary policy. The expectation still remains for a 2017 rate hike, but should inflationary pressures begin showing, that expectation could certainly be moved up, and the British Pound will likely move along with it.