Cable has been rising since its November lows amid a combination of factors. For one, the uncertainty around the Autumn Budget has largely been resolved. UK Chancellor Rachel Reeves appears at least for now to have found the sweet spot of raising taxes just enough to cover the fiscal hole without seriously dampening the economic outlook. Discussions about the Budget at this point revolve primarily around the leak controversy, which is not a major concern for markets.
Now traders are moving their attention to the main factors that could drive cable. Those include the release of October GDP figures on Friday, and next week’s BOE decision. The British economy has been declining through the course of this year, and investors are looking to see when (or if) it will stage a rebound. That could be pivotal for determining the BOE’s outlook, given the strong divisions seen among policy makers.
How Cable Can Rise
The slowing economy has left more economists convinced that the BOE will continue its easing cycle. Lack of growth increases slack in the jobs market, a growing concern for the BOE. Typically, rate cuts translate into a weaker currency. However, in the case of the GBPUSD, the Fed is also expected to cut rates next year.
What could be determinate for the direction of cable is not whether the BOE cuts, rather if it’s easing rate is faster or slower than the Fed’s. The recent uptick in cable suggests that markets might be betting that the BOE will not ease as fast as initially anticipated, particularly since the Budget did not have many of the feared taxes. In fact, the central bank estimates that the Budget will reduce inflation in the first quarter.
Growth Coming Back into Focus
The UK economy has progressively slowed through the course of the year. Q1 managed 0.7% growth, but then Q2 saw only 0.3% and Q3 was practically stagnant at 0.1%. The hope is that Q4 would be the turning point.
A faster growing economy would mean more funds for the Treasury, and keep deficit hawks at bay. This would be positive for the pound, on top of the BOE having more room to keep rates elevated as long as inflation is still above target. On the other hand, if the economy were to dip in to negative territory, then the risk of a recession looms. This could doubly hurt cable, as it means the BOE is more likely to cut and deficit hawks could come back to pressure sterling. If the British economy underperforms the OBR’s expectations, then concerns about the fiscal hole could return and drag the pound lower.
What to Look Out for
On Friday’s release of UK September GDP figures, the consensus among analysts is for a return to growth at +0.1% compared to -0.1% a month earlier. This might help reassure investors that the UK economy has turned a corner and increase demand for the pound.
On the other hand, if the data disappoints, it could leave investors waiting for more solid signs of an economic recovery. And it could increase bets that the BOE will cut next week. Both factors would likely weigh on the pound.