British Pound Decline v US Dollar and Euro Continues Despite Sanguine Bank of England
The January meeting of the Bank of England was more positive than many had been expecting, yet pound sterling continues to edge lower against the USD and EUR.
The pound to dollar exchange rate is in retreat once more with the multi-month sell-off showing no signs of abating with some forecasters warning that a level of 1.36 is achievable within 3 months.
The pound to euro exchange rate is also falling and is teetering above the next level of support at 1.32.
When it comes to trading against the EUR and USD it is apparent that risk conditions in global markets are perhaps the most important deciding factor. We have argued this case before and believe that until financial markets push higher sterling may continue to struggle.
Bank of England Fails to Deliver Support
The reaction by sterling to the January Monetary Policy Committee meeting has actually been quite sanguine - the minutes from the meeting indicate that inflation growth is expected to remain weak.
Only when the Bank believes inflation growth is accelerating will they likely lean towards raising rates.
"The 40% decline in dollar oil prices means that the increase in inflation is now expected to be slightly more gradual in the near term than forecast in the Committee’s November Inflation Report projections," say the Bank.
And importantly, "core inflation also remains relatively subdued – a consequence of the past appreciation of sterling, weak
global inflation and restrained domestic cost growth."
“George Osborne warned the British public to be ready for an interest rate rise, but we’re still some way off if yesterday’s dreadful manufacturing figures are anything to go by," says Dennis de Jong at UFX, "an interest rate rise this year is still a possibility, although the Bank of England may be forced to sit on its hands until 2017 if the data doesn’t improve dramatically."
Latest Pound/Euro Exchange Rates
  | Live: 1.1448▲ + 0.04%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1059 - 1.1105 |
**Independent Specialist | 1.1288 - 1.1334 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Chasing Shadows
Calling the interest rate rise is like chasing a shadow - every forecast since 2013 on the timing of that rate rise has proven wrong with the rise being kicked into the distance, year after year.
It is no wonder then that the British pound exchange rate complex is one of the worst performers in 2016.
Money markets have pushed back expectations for the first interest rate rise to 2017; sterling has fallen in sympathy.
“The case for an early move has been undermined both by downward revisions to UK growth momentum over 2015, and signs that pay pressures are failing to materialise. On balance, we still expect Ian McCafferty to plump for a vote for an immediate policy tightening,” say Lloyds Bank in a client briefing ahead of the event.
Is the Pound Oversold?
Calling a turn in trend is pretty difficult, nevertheless some are arguing that sterling is potentially oversold, particularly against the euro. Therefore the risks for a recovery in GBP are growing in our opinion.
"GBPUSD has been under pressure, trading as far down as 1.4360, with 1.4300/1.4290 noted important Fibonacci support. From here, we favour the pair to consolidate," say Lloyds Bank in a Friday briefing to clients.
2y rate spreads (in swap terms) widened yesterday (as shown in chart 2) and GBPUSD is now likely to re-align with rates, assuming risk sentiment does not deteriorate further.
"To the topside, 1.4475/1.4550 provides near-term resistance," say Lloyds.
