Trouble Ahead for the Pound?
The sterling has been on the back foot for the last couple of days. Even as BOE’s Bailey said that they met the minimum conditions for a rate hike, the pound fell in comparison to other currencies.
What’s behind this move? And will it continue, considering the mass of data coming out tomorrow?
A host of MPC members spoke on Wednesday, and they repeated a general theme almost word for word. Specifically, they said that they achieved the minimum requirements for a rate hike, but the conditions weren’t sufficient.
On the surface, it sounds like they are thinking of a rate hike. But the market is taking it as dovish because it means that the BOE is looking for a stronger argument than usual before agreeing to a hike.
Will they keep the policy on hold?
MPC members generally argued that the current yield curve was enough to keep inflation temporary. In practical terms, this means that interest rates will probably go up in the future.
Hence borrowing for longer periods of time (which is called ‘further down the curve’) will increase interest rates. With higher borrowing costs in the future, the expectation is that there will be less liquidity, so less inflationary pressure.
That’s the theory.
It’s important to note Bailey’s comment that the market is pricing in higher rates, and seems comfortable with the trajectory. He said that the MPC was equally divided on whether they reached the conditions for raising rates.
However, most of his remarks about the recovery were couched with “it’s early days”, and they would look at how things will evolve.
What does that mean?
In summary, the implication is that the BOE is content with the current market expectations, and is waiting for some better data before they move.
Overall, this means we should have somewhat calmer trading in the pound pairs. That is unless we get some major agitation in the macroeconomic releases.
Speaking of which, tomorrow we have a couple of key bits of data that could drive the pound. The trade balance is important for technical reasons, and the rolling 3-month GDP figure is likely to have implications for the BOE’s policy.
What are we looking for?
All the data comes out at once before the market opens, so we could see some interesting volatility.
What will probably have the most immediate impact on the markets, and could set the tone for the pound pairs for the day, is the trade data. A larger trade deficit ordinarily weakens a currency, while a narrowing of the deficit provides strength.
Economists project the UK’s Balance of Trade to narrow the deficit to -£2.0B, from -£2.5B prior. Fewer imports generally drive these numbers. Moreover, they anticipate the goods trade balance to shrink to -£11B from -£12B prior.
As for the three-months-to-July GDP, expectations show an important decrease in growth pace to 3.8%, from 4.8% in June (that was the second quarter). Part of this can be due to the positive growth in April rolling off the measure.