GBP strength fades away
Well the rumours were almost true, a third person did in fact vote for a rate hike, but it wasn’t the rumoured Vice Chancellor, Charlie Bean, but in fact BOE chief economist Spencer Dale. It meant the February meeting was split 6-3 in favour of keeping rates on hold and for all you trivia buffs the last time this happened was July 2007 – so the significance of the split should not be underestimated.
So where does this leave UK monetary policy? Well the momentum is clearly moving with the rate hike camp and the bullish tone of the minutes further supports this sentiment. The minutes did however caution “that there was merit in waiting to see how indicators of the economy performed at the start of year”. A basic interpretation of this statement would be that if the Q1 indicators continue to be positive then the BOE may have the scope to raise rates – with the market currently targeting a May rate hike.
So where does this all this leave the pound? Well that is as clear as mud. After the minutes were released yesterday the pound rallied against the dollar to $1.6270, but in the early morning trading had given up more than a cent trading at 1.6160. Now technical indicators – where traders look for trends and patterns as opposed to the fundamentals – could be at play here. Avoiding the miniscule technicalities, the market is forecasting the distinct possibility that the pound will weaken against the dollar in the near term. Now with any forecast, it is only a forecast and should be taken as that – but is something to be aware of.
Moving onto mainland Europe and figures released yesterday showed industrial orders unexpectedly rose in December on surging demand – adding weight to the belief that the European economy is recovering as a whole, which bodes wells for the UK largest export market. It also supports market sentiment that the ECB may have scope to increase rates soon with rather hawkish statement in recent times from ECB members further supporting this view. This helped support the Euro, with the GBP/EUR trading lower at 1.1774 in the early morning session.
In today’s data releases, the main reports to watch out for are the EU’s Business Climate Index, which will provide further signs of the EU’s economic health and UK’s Nationwide House Prices index – which from my homeowner’s perspective may be slightly depressing. There is also a raft of important US data including initial jobless claims and durable goods orders. Positive figures will show the US recovery continuing apace.