Recently the UK has been experiencing an on-going stream of positive data reflecting progress on the outlook for the economy. However in recent weeks the GBP has failed to capitalise on the increased optimism provided by positive data.
The release of UK Services PMI data shocked the market by exceeding expectations at 60.2 from 56.9 previously. Furthermore, industrial and manufacturing data were also positive with 1.1%m/m and 1.9%m/m growth respectively. Despite all of this good news, GBP has struggled to strengthen against its major counterparts.
The market had been anticipating the BoE inflation Report outlining forward guidance on the direction of interest rates. The release of the report as well as BoE Governor Mark Carney’s comments was broadly in line with expectations, with the MPC accepting that the UK recovery is underway but confirming market concerns that the recovery is still weak by historical standards. Most importantly, Carney expressed that the MPC intends to “maintain the current highly stimulative stance of monetary policy” until employment data improves, similar to forward guidance provided by the Fed. So low rates are here to stay for a long time to come, but we knew this.
On the release of the report and the accompanying statement last week, the pound initially weakened, but soon rebounded sharply against the USD closing at 1.5489 from opening at 1.5349 on Wednesday. It seems like this was exactly what the market was waiting for to provide the GBP with that extra strength it deserved after recent positive economic signals. The release of some strong UK trade data presented the opportunity for the pound to post its biggest weekly gain in a month as the trade deficit narrowed.
The dollar started August on the back foot thanks to a disappointing non-farm payroll figure but figures since then have been rather more encouraging. ISM manufacturing data exceeded expectations at 56.0 and the trade balance figures were positive with the trade deficit narrowing to $34.2bn, supporting US GDP growth. This set of releases definitely provides evidence that the US economy is in recovery mode; however the lack of detail on the timing of possible QE3 tapering is putting pressure on the USD.
The market continues to wait for an indication of when QE3 tapering will take place and comments from Fed officials point to the need for better employment figures. Last week, the release of unemployment claims was positive, with the average number of jobless claims declining to 335,500(the lowest figure since 2007), thus providing another boost to the view of the US recovery. This has gone some way to reduce concerns after the July non-farm figure.
Bearing in mind both the UK and US have been releasing positive data, the outlook for GBP/USD is as uncertain as ever. We now know that the BoE has linked its interest rate outlook to employment, and this corresponds to Fed statements claiming that QE3 tapering is dependent upon labour market improvements.
There is an argument that the gains for the pound after Carney’s comments were premature, and should have been dependent next week’s employment data. The market didn’t seem to cut the US any slack when it came to the disappointing non-farm payroll figure. In fact, the doubt in the US labour market was reduced when the jobless claims figure was released yet it still hasn’t resulted in the USD gaining much ground. This makes us think the USD dollar has some catching up to do with respect to recent figures. While the likelihood of QE3 tapering is increasing in the US, the UK is rather highlighting its “highly stimulative stance”. If the market is looking for some indication of future QE prospects then the higher possibility of further stimulus in the UK should be something to worry about. This slight divergence in UK and US monetary policy should favour the USD in the months ahead.
Sasha Nugent,
Currency Analyst
Caxton FX
