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Want to Trade Sterling? Review the Fundamentals

Want to Trade Sterling? Review the Fundamentals

Benjamin Spier, Technical Strategist

Pound Fundamental Factors

LAST UPDATED

EVENT TITLE

EVENT EXPLANATION

IMPACT LEVEL

EFFECT ON CURRENCY

Feb. 12 2013

Inflation

UK inflation was reported at an eight month high of 2.7% for the fourth consecutive month in December. The BoE expects inflation to exceed its 2% target for the next two years.

Medium

Higher inflation may be Pound positive.

Feb. 7 2013

Carney to Take Over as BoE Governor

Bank of Canada Governor Mark Carney will take over as the Bank of England Governor on June 1. Carney said he prefers flexible inflation targets over a nominal gross domestic product to determine monetary policy. His comments were not as dovish as many had expected.

High

If Carney increases monetary stimulus when he begins his term with the BoE it may be Pound negative.

Feb. 7 2013

Monetary Policy

The BoE kept the interest rate and asset purchase target unchanged in their February meeting. Higher inflation and the success of the Funding for Lending Scheme may have been responsible for the BoE not raising quantitative easing. The MPC voted 8-1 to keep the asset purchase target unchanged in the January meeting. However, King said in a speech in January that easing may be raised above 375 billion if conditions deem it necessary.

High

Additional quantitative easing or a rate cut may be Pound negative.

Feb. 7 2013

Currency Strength

There are light talks among analysts of the possibility that the UK will try to lower the Pound exchange rate to give a boost to exports. Carney said in February that central banks can’t be indifferent to FX moves, but intervention shouldn’t be used if other tools are available.

Low

Any official talk of currency intervention may be Pound negative.

Feb. 1 2013

Purchasing Managers' Index

UK PMI for services returned to expanding at 51.5 in January, following a brief dip below 50.0 in December. The PMI surveys sector activity and indicates economic performance for the coming month.

Medium

A higher PMI may be Pound positive.

Jan. 30 2013

Funding for Lending Scheme

An eleven month high in UK mortgage approvals may show effectiveness of the BoE’s FLS program. UK Business Secretary Cable said in January that FLS is helping mortgage lending but not small companies.

Low

Higher mortgage approvals may be Pound positive.

Jan. 25 2013

UK GDP Growth

The UK economy declined 0.3% in Q4, and is now one quarter away from a technical triple dip recession. The UK economy saw positive growth in Q3 of 2012. However, the BoE said the growth may have been due to one time factors. BoE’s King previously said a gentle recovery is underway, and predicted the UK economy will recover well into 2013. BoE’s Miles said in January that the UK economy will improve by 2%-2.5% within a year to 18 months, the comments were especially hawkish for the MPC’s usual dove. The Telegraph reported over the weekend that the BoE will forecast in its inflation report that inflation is expected to remain above 2% until 2015, but the economy is too weak for hawkish monetary action. NIESR cut its 2013 growth forecast to 0.7% in February.

High

A further decline in UK GDP may be Pound negative.

Jan. 23 2013

Referendum on EU Membership

PM Cameron announced that the UK will hold a referendum on its EU membership in the first half of the next parliament, meaning the referendum will likely fall out between 2015 and 2017. The UK will attempt to negotiate a change in EU treaty laws before the referendum, Cameron is optimistic for changes and said he wants the UK in a changed EU, and German Chancellor Merkel has also said she is willing to negotiate. Former BoE member Posen called it madness to wait until 2017 because of a chilling effect on business investments. The British government estimates that about 3 million UK jobs rely on trade with other EU countries, and half of UK exports go to the EU.

High

Signs of the UK seceding from the EU may be Pound negative.

2012

Government Debt

The UK budget deficit remains at more than 11% of GDP, and Chancellor Osborne has said that austerity will continue until 2018.

Low

The effect of debt levels on the Pound are usually minimal.

Ongoing

Risk Correlation

On a yearly basis, GBP/USD has a correlation of about 0.469 to S&P futures.Over the past month of trading, GBP/USD had a -0.3757 correlation to S&P futures.This means that the Pound is slightly positively risk-correlated, but not reliably.

Medium

Improved risk appetite may be Pound positive, but not necessarily.

Ongoing

Euro-zone Debt Crisis

The UK economy is negatively affected by the Euro-zone debt crisis because of its exports to Europe and money spent on bailing out struggling countries. Improvements in the Euro-zone economy may therefore help with UK economic growth.

Medium

On a long-term horizon, improvements to the Euro-zone economy may be Pound positive.

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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