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Sterling rallies as UK services growth builds case for rate rise

The pound rose on Wednesday after a survey showing Britain’s dominant services industry gained momentum last month fuelled expectations of a Bank of England interest rate rise this summer.

After a sluggish start to 2018, the British economy is showing tentative signs of a recovery with surveys this week for the manufacturing, construction and services sectors beating expectations.

That has brought some respite for sterling after weeks of losses caused by worries about whether Britain can secure a deal with the European Union before it leaves the bloc next March.

The IHS Markit/CIPS services Purchasing Managers’ Index (PMI) unexpectedly rose to an eight-month high of 55.1 in June, beating economists’ average forecast in a Reuters poll for it to remain unchanged at 54.0.

The pound rose to $1.3201, a five-day high, from $1.3176 before the data GBP=D3 and away from 2018 lows hit last week of $1.3050.

At 1510 GMT the pound was up 0.3 percent versus the euro at 88.18 pence and heading for its biggest daily gain against the common currency since the European Central Bank signalled on June 14 that any interest rate rise was still distant. EURGBP=D3

“The momentum continues for the British economy, the services PMI data has lifted hopes that the Bank of England will raise rates sooner rather than later,” said Naeem Aslam, chief markets strategist at Think Markets UK.

Markets are pricing in an 88 percent chance of a single 25-basis-point increase by the end of 2018 and a 53-percent chance of an August rate rise.

Last month BoE chief economist Andy Haldane joined two other members of the nine-strong Monetary Policy Committee in calling for a rate rise, and official data was revised to show the first quarter slowdown was less severe than first thought.

The pound has slumped recently because of weakness in the economy, a resurgent dollar and fears that Prime Minister Theresa May will run out of time to agree a deal with the EU on the post-Brexit relationship.

The currency weakened more than 6 percent between April and June, its worst quarter since the 2016 referendum vote to leave the EU.

On Monday it fell despite relatively robust manufacturing survey data as investors worried about a looming a Brexit cabinet meeting later this week.

“Although there is good reason for the BoE to want to further normalise interest rate policy, the chances that a Brexit deal will not be struck in the coming months leans against the risk of a policy tightening,” said analysts at Rabobank in a note to clients.

The note said the pound would drop to $1.28 by the end of the year.

Source: UK Reuters

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The pound is the ‘darling of the currency world’ right now — and it’s only going to get better

  • The pound is the “darling of the currency world” right now, according to ING FX strategist Viraj Patel.
  • That’s because the pound has stopped trading on Brexit developments for the time being, and is moving more on its fundamentals.
  • “Gone are the days of noisy Brexit headlines stirring sharp – and almost sentimental rather than fundamental – knee-jerk moves in the currency,” Patel wrote.
  • The pound is currently trading at around $1.42, close to its highest level since the Brexit vote. You can track its progress on Markets Insider.

LONDON — The pound is the “darling of the currency world” right now as it finds a sweet spot during a lull in developments over Brexit, and benefits from continued weakness in the dollar.

Writing on Friday, Viraj Patel, currency strategist at Dutch bank ING noted that “2018 is very much a different Brexit trading environment for the pound,” compared to the last year and a half of pain following the UK’s vote to leave the EU back in June 2016.

Several factors have played a role in this recent resurgence, ranging from increased market confidence that the UK and EU can strike a Brexit deal, to falling confidence in the agenda of US President Donald Trump.

Britain’s better than expected economic performance in the last 18 months has also boosted sterling in the first quarter of 2018.

“Gone are the days of noisy Brexit headlines stirring sharp – and almost sentimental rather than fundamental – knee-jerk moves in the currency, with the buffer of last month’s Brexit transition deal buying GBP investors some extra time to assess the Brexit facts,” Patel wrote.

The pound has shifted, Patel said, from trading on political developments around Brexit, and moved towards trading on cyclical factors like data, which provide a view of the state of the British economy.

“With the next stage of negotiations surrounding a future UK-EU trade deal, which begin next week, likely to be long-winded and complex, it appears that we’re back to good old-fashioned UK data watching to determine the short-term direction for the currency,” he said.

That data driven trading means that the next week or so could be a big one for the pound, with numerous data releases on the immediate horizon.

“The week ahead shouldn’t disappoint here given the array of key data releases to watch out for – including the latest UK labour market report (Tue), CPI data (Wed) and retail sales (Thu),” Patel said.

Strong data next week, he added, should boost the pound even further, as it is likely to increase the chances of the Bank of England raising interest rates at its May meeting, which is now just over two weeks away. Higher interest rates are, broadly speaking mean higher currencies — so if the BoE does raise rates from 0.5% to 0.75% on May 3, the pound should benefit.

“We think signs of firming wage growth next week may seal the deal for a May BoE rate hike – though it is the UK activity side that may hold the key to the pace of BoE normalisation and GBP’s cyclical re-pricing,” Patel said.

Another factor helping the pound be a currency darling right now, is its traditionally strong performance in the month of April.

The pound has traditionally performed well in April, regardless of both the political and economic situations in the UK and globally.

“April seasonality is approaching again for GBP, which tends to rally no matter what the political/macro backdrop,” Kamal Sharma, a strategist at Bank of America Merrill Lynch wrote in a note to clients in late March.

Sharma calculates that the pound has ended every April for the last 14 years at a higher level against the dollar than it started the month.

“Within the G10 FX complex, there is no stronger seasonality than in GBP through April,” Sharma wrote.

That trend includes major events including the financial crisis, general elections, and the Brexit referendum.

The pound is currently trading at around $1.42, close to its highest level since the Brexit vote, as the chart below shows:

The pound is the 'darling of the currency world' right now — and it's only going to get better Commercial Finance NetworkMarkets Insider

ING’s forecast, considering all the above information, is that the pound will continue to appreciate, ending the second quarter at around $1.45.

Source: Business Insider

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British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade

Pound Sterling on front foot in final week of 2017. Economic and political news flow is thin but there’s scope for low volumes to exaggerate moves in FX.

Sterling overcame resistance from a weak US Dollar Wednesday, although a more robust performance against the greenback by the Euro helped push the Pound-to-Euro rate down by a fraction – reversing an earlier gain for the pair.

Price action comes amid a light flow of economic data and low volumes in foreign exchange markets as London, the main centre for currency trading, operates with a skeleton crew throughout much of the current week.

“The UK has returned from the long holiday weekend, though with another one coming up and the Pound in the middle of a bigger range, there doesn’t appear to be much incentive for the market to be wanting to make any big pushes,” says Joel Kruger, an FX strategist at LMAX Exchange.

The Pound was quoted 0.16% higher at 1.3394 against the US Dollar by the London close while the Pound-to-Euro rate was marked 0.20% lower at 1.1255. The Euro-to-Dollar rate was quoted 0.35% higher at 1.1899.

“The market has been consolidating but ultimately looks poised for a continuation of the 2017 uptrend, with a higher low waiting to be confirmed at 1.3027 on a break of the 2017 high at 1.3658, Kruger adds, referring to the Pound-to-Dollar rate.

“This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018,” Kruger adds, referring to the Pound-to-Dollar rate.”

British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade Commercial Finance Network

Above: Pound-to-Euro rate shown at hourly intervals.

2018 Agenda: UK Economy and Brexit

The ebb and flow of economic growth and the stop-start march of Brexit negotiations have been front and centre for the Pound in much of 2017.

Similar will be true for the currency in 2018, with traders looking to see talks on future trade and transition opened once into the New Year, while hoping for another interest rate rise from the Bank of England.

“For the next week and possibly two, we do not expect new Brexit developments as the U.K. Parliament isn’t expected to debate on the issue until mid January,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.

“There are no major U.K. economic reports scheduled for release until next week at which point the pace of growth and more specifically the PMI reports will be in focus.”

Next week sees January and the New Year get underway with the monthly surveys of purchasing managers across the manufacturing, construction and services industries, which will be among the final inputs to expectations for economic growth in the final quarter and 2017 as a whole.

Talks around a possible “transition deal” will begin in January, with markets hoping to see a quick agreement struck in the first quarter, before discussions move onto future trade ties after the next European Council meeting.

Simultaneously, markets will be positioning for the next round of Bank of England growth and inflation forecasts, due for release in February. These will be key for the market’s evolving expectation of future interest rate decisions.

The Sterling Overnight Index Average (SONIA) rate most recently implied an expectation by the market that the Bank of England will wait until February 2019 before raising UK interest rates again.

However, the UK economy is recovering its lost momentum, wage growth is picking up and inflation of 3.1% is still more than 100 basis points above its target, which could mean there may be scope for the BoE to signal an earlier move is possible once into the New Year.

This would be positive for the Pound, particularly when considering that markets are already braced for three Federal Reserve hikes in 2018 and that the European Central Bank is yet to announce a full exit from its quantitative easing program.

Source: Pound Sterling Live