Currency Analyst since 2010

E. Belugina: How much strength GBP has?

   Elizaveta Belugina

British pound remains under pressure versus the US dollar despite some better than expected figures from the UK and worse than expected data from the United States.

Britain’s Manufacturing & Construction PMIs rose in January (see the data below):

British economic picture isn’t rosy

The UK manufacturing sector is expanding very slowly – in the final quarter of 2014 it rose by only 0.1%. In January the picture isn’t much better. As a result, manufacturing is unlikely to drive British economic growth. Data released last week showed that the nation’s quarterly GDP growth slowed down from 0.8% in Q1, 2014, to 0.5% in the final 3 months of the year.

In addition, the prices paid by UK manufacturers for raw goods fell at the fastest rate since May 2009 because of the falling oil prices. As a result, British produces as well have significantly cut their prices. This increases pressure on the inflation in Britain which is already below the Bank of England’s target level. As a result, Britain’s central bank will be less likely to move towards raising rates.This is negative for GBP vs. USD.

What will the Bank of England do?

At the last meeting all members of the Bank of England voted to keep monetary policy unchanged (earlier 2 members of the Monetary Policy Committee proposed to raise the benchmark interest rate).

As many central banks have switched to easing, we expect the Bank of England to stay in the “wait-and-see” mode by a unanimous decision. Although Governor Mark Carney has been trying to prepare the ground for the rate hikes, it seems that the time for that hasn’t come yet. The bright spots for pound may come from the central bank’s assessment of the labor market and of the regulator says that low oil prices are a net positive factor for the national economy.

It will be also very important to watch the Bank of England’s quarterly Inflation Report which is due next week (February 12).

The upcoming election in Britain starts affecting GBP

Another source of negative pressure on GBP is the UK general election in May.

According to the opinion polls, the Labour party and the Conservative party have about 30% of the votes. The rating for the Liberal Democrats which now form the ruling coalition with Conservatives has dramatically fallen. This gives Labour an advantage. The prospects of the Labour party’s victory are regarded as negative for GBP, because Labour may conduct a more austere policy and increase taxes.

Outlook for sterling

As the US Federal Reserve is seen to be more hawkish, GBP/USD should be limited on the upside. Resistance is at 1.5270 and 1.5350. The odds are that pound will test 1.4850/13. Also watch data from the US.

Although the Bank of England can’t compete at normalizing policy with the Fed, it is expected to be ahead of the European Central Bank. As a result, EUR/GBP will likely soon resume decline targeting 0.7370 and 0.7200.


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