Last week was a better week for the pound with traders and investors maybe tiring of their negativity against sterling. The data picture presented to us by the UK economy was largely uninspiring and has resulted in a number of analysts, myself included, delaying their thoughts on when the Bank of England will begin to raise interest rates. We have moved ours from May of this year until November.
‘The I word’
As we pointed out in our analysis of Mark Carney’s speech last week, while EU referendum risk is the hot topic being discussed when looking at the UK’s economic and political landscape, it is inflation that is truly the biggest issue. Carney mentioned it 110 times in his 40 minute speech, ‘the I word’ dominated the minutes of this month’s Bank of England meeting too and another Bank of England policymaker, Gertjan Vlieghe, commented that inflation pressures are likely to ease outright or disappoint relative to forecasts.
Energy prices are down in the gutter and oil markets remain sick as the proverbial parrot so economists and policymakers eager to see inflation pressures build are once again looking to the labour market. And again, the UK economy is set up to disappoint.
Last week’s figures showed that the slack in the labour market is still being taken up, and subsequently unemployment has fallen to its lowest level in a decade. The absence of wage pressures given the tightness in labour markets is the factor that is puzzling and dismaying us and policymakers in equal measure. Average wages grew by 2%, nowhere near enough yet for a pick-up in inflation. The speed of any ensuing jobs growth is likely to slow as the natural rate of unemployment is reached, but without wage increases this matters little for now.
The week ahead
Looking ahead, we expect that Mark Carney will shy away from monetary policy when he represents his work as part of the Financial Policy Committee to the Treasury Select Committee tomorrow morning. They published a report in December that will see a discussion on an increased buffer on lending for UK banks so as to protect against non-performing loans amidst a credit downturn.
Later tomorrow Kristen Forbes speaks in London, while on Wednesday BOE members Bailey and Shafik speak on European and payment industry matters respectively.
It is Thursday morning’s GDP numbers, however, that will likely have the largest impetus on sterling this week. The UK economy is expected to have grown by 0.5% on the quarter and 1.9% on the year; another reading that would continue the overwhelming feeling that growth in the United Kingdom is solid but not spectacular. We have to remain guarded about calling growth much stronger in the coming quarters; the global outlook is hardly something that engenders overt positivity and the pace of fiscal retrenchment from the Conservative government will act as a depressant.
Sterling to bounce back v euro
With this in mind we must remain cautious about calling for too much of a revival in sterling’s fortunes. We are looking for GBP to bounce back pretty handily in the coming weeks against the euro. Draghi’s press conference at Thursday’s European Central Bank meeting was a polite reminder that the ECB will attempt to wrestle back control of the inflation picture in the coming quarters and that a weaker euro is a welcome by product. Against the dollar the situation may be slightly more difficult although GBPUSD is oversold according to technical and sentiment indicators.