Cable is back in focus with a data point that could move the consensus on what the BOE will do at its next meeting. The latest survey of economists shows a 67% chance that there will be another quarter point rate hike. The remainder expect the BOE to pause.
A disappointment in the GDP figures led traders to expect a hike to be less likely. On the other hand, if GDP grows more than expected, then the consensus around a rate hike could consolidate some more and support the pound.
What to look out for
UK February monthly GDP is expected to grow at 0.1% compared to 0.3% in January, which was a surprise improvement over the -0.5% recorded in December. The UK managed to eke out a positive quarter at the end of last year, and avoid technically falling into a recession. But the slow growth concerns have not gone away. The rolling three-month growth rate is expected at -0.1% compared to 0.0% reported previously.
Manufacturing production is expected to show another negative, though not as bad as the prior month. The forecast for annual Manufacturing Production is for -4.7% compared to -5.2% in January. This is in part thanks to a turnaround in the monthly figure, which is expected at 0.2% compared to -0.3% reported previously.
The gathering clouds
Just yesterday, the IMF updated their forecasts for annual growth, and reaffirmed that the Uk will be the only major economy to record negative growth this year. However, the projections were revised higher to -0.3% from -0.6% that it had forecast previously.
Aside from the potential inflationary pressures, the extensive strikes in the UK over the last months have been contributing to lower productivity, which has weighed on GDP forecasts. The BOE has been hesitant to attack inflation as aggressively as the US and now even the ECB fears that it would worsen the economic situation. Last year, the BOE forecast the UK was already in a recession, though that didn’t technically come true.
What it all means for cable
The main issue for cable remains with the BOE, and its plodding rate increases. The Fed has managed to widen the interest rate gap over the UK, making dollars relatively more attractive than pounds. Meanwhile, the ECB is closing the gap in interest rates, increasing incentives for investors to move to the continent. If the ECB hikes by 50bps as expected, and the BOE fails to raise at the next meeting, then the interest rates between the two economies will be at parity. But with the higher inflation in the UK, the real yield on bonds would be in favor of the EU, and could continue to weigh on the pound.
The BOE’s worries about bringing the economy down could be substantially alleviated if the UK manages better than expected GDP growth. That could translate into a stronger cable, as investors are increasingly pricing in rate cuts by the Fed later in the year. But given the small margin over zero, a slight underperformance in the GDP figure could lead to worries of a recession, and a weaker pound.
