GBP gains appear limited in the near term – BTMU

Derek Halpenny, European Head of GMR at BTMU, assessed the current and longer term prospects for the Sterling.

Key Quotes

“Pound selling in response to the BoE QIR and meeting minutes yesterday was an indication that market participants were braced for a possible hawkish slant to the monetary policy guidance. That expectation was understandable given the continued resilience of the economy. However, the BoE has managed to maintain its message of no shift in monetary policy mainly down to one fact. The upgrade to real GDP growth (1.4% to 2.0% in 2017) due to stronger demand-side conditions has been pretty much matched by an increase on the supply-side”.

“The annual overview of supply-side conditions resulted in the long-run equilibrium unemployment rate dropping from 5.0% to 4.5%. That along with the stronger growth forecast actually resulted in the peak in annual inflation coming down ever so slightly from 2.83% to 2.75% in Q2 2018”.

“From an FX perspective, this is certainly enough to keep the UK rates market in check in circumstances of stronger than expected economic data. That will clearly help limit upside risks for the pound”.

“However, this action by the BoE will only contain rate hike expectations if the flow of economic data backs up their assumptions. The average weekly earnings annual growth rates have been accelerating over the past four months while survey evidence suggests little impact on labour market conditions from the Brexit vote. For example, the monthly survey from the Recruitment and Employment Confederation showed faster temp help hiring and accelerating pay in December to a level last seen in April”.

“If the economy continues to exceed expectations like it has done since Brexit, the BoE will find it increasingly hard to justify maintaining what is essentially an emergency monetary stance triggered by Brexit. The BoE action yesterday will limit upside pound risks for now but further out the resilience of the UK economy will be one of the factors that will help GBP/USD advance to the 1.3000 level”.