GBP: Sighs of relief? - Rabobank
Jane Foley, Senior FX Strategist at Rabobank, explains that for a brief period this morning GBP was the best performing G10 currency on a 5 day view and the UK’s effective exchange rate (BoE measure) is also well off its late 2016 low, which should provide some reassurance to BoE policymakers ahead of tomorrow’s interest rate decision.
Key Quotes
“GBP is gaining ground this morning ahead of tomorrow’s MPC meeting. In June the market was taken back by the announcement that three members of the committee had voted for an immediate interest rate hike. Although Forbes has since left the BoE, hawkish comments from BoE Chief Economist Haldane suggest that he may join Saunders and McCafferty in voting for a rate rise this month. In June Haldane commented that data and risks have “altered materially over the past nine months or so, for a number of reasons”. Specially, he pointed to the improvement in world growth and the lessening in downside risks to inflation globally. Haldane also pointed out that post referendum fears about UK growth have failed to materialise.”
“In contrast to the view recently expressed by dove Vlieghe, Haldane concluded that “the balance of risks associated with tightening ‘too early’, on the one hand, and ‘too late’, on the other, has swung materially towards the latter in the past six to nine months. He also stated the view that “provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year”.”
“Whether Haldane does move to the hawkish camp this week would appear to depend on whether the data are perceived to be still ‘on track’. Over the past month UK industrial production data trade data, some housing surveys and some PMI surveys have disappointed. On the other hand the latest UK PMI manufacturing release and June retail sales data have surprised on the upside. The latter, however, has been linked with warm June weather and the better pace of consumption that month is considered by some commentators as a last hurrah before consumers succumb to the reality of falling real wages.”
“In spite of the backdrop of strong world growth the UK eked only a modest pace of expansion in H1 2017, falling behind the rate of growth in the Eurozone. Given the risks to consumption associated with falling real wages and the shadows over investment given political uncertainty, we expect the dovish camp to maintain its dominance at the BoE for some months yet.”
“The combination of the sluggish USD and the possibility that 2 or 3 MPC members will continue to state a preference for an immediate rate rise in the coming months should continue to offer GBP/USD support. However, we remain of the view that Brexit related uncertainty and an improvement in Eurozone fundamentals will drive EUR/GBP higher medium-term. We forecast a move towards EUR/GBP 0.92 by the middle of next year. Our 12 mth forecast for GBP/USD stands at 1.30.”