Cracks beginning to show – Uncertain times for GBP

24 October, 2014

Matthew Boyle

It has been a week of ups and downs for the majors but most particularly for GBP. Monday and Tuesday were relatively quiet days with little data of note released. As we moved to Wednesday we saw the first major release with the Bank of England minutes. It has been widely reported that in recent weeks that Mark Carney has done somewhat of a U-turn on the notion of an interest rate rise from 0.5% to 0.75% as we are not hitting inflation targets of 2%. As such much of the market has been keenly watching to see if there would be a change to the MPC vote as an indication perhaps of when if at all this change could occur. The vote remained unchanged with 7 of the 9 members voting to hold whilst 2 remained voting for a hike. Certainly news that interest rate hikes are now looking a long way off is GBP negative and as such the short-mid term outlook for GBP is negative. Interestingly though following this vote and stirrings that the ECB are readying a stimulus package helped stage a small rally with GBP gaining against EUR – slightly strange and against the current overall trend. It is certainly worth noting that aside from the interest rate concerns for GBP we are also being warned about a shortfall in taxes in the UK, and also an economic downturn.

Yesterday highlighted some of the cracks that are beginning to show for the pound as a raft of retail data all came in under expectation. Some may blame the mild weather for the poor results but certainly it would seem the sentiment has changed from a month ago where we were close to 6 year highs against EUR and USD. Throughout the day’s trading GBP suffered and lost and 75 pips against EUR with Spain surprisingly posting a drop in unemployment, and around 60 pips against the USD, currently performing well which also posted a reduction in jobless claims aiding its gains. This week USD has also managed to gain almost 2.5 cents against the struggling EUR following this strong data but also amongst rumours of the Eurozone stimulus package which Draghi has been hinting at for some time.

Today’s focus will largely be on the UK GDP report at 09.30am to see whether or not the UKs economy is indeed beginning to struggle. With ongoing concerns over economic growth and recent poor PMI results a result under prediction here could cause the pound to lose ground rapidly particularly against the currently fairly string USD. With analysts already predicting a contraction to 3% from 3.2% (albeit this will be priced into the market) even a 0.1% drop n prediction could see GBP easily drop to the lowest levels of buying against both USD and EUR we have seen in some weeks. It will also be a telling result as to the overall current state of the UK economy- are cracks beginning to show? Moreover it adds to the ongoing question of “if” and “when” we may see a BoE interest rate hike in the UK.

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