GBP is seeing heavy losses on Thursday the 28th July despite strong data being released over the past 24 hours confirming that expectations for an interest rate cut at the Bank of England in August is the overriding concern for FX traders.
- The Pound to Euro exchange rate today: 1.1877, 0.70% down on a day-to-day basis
- The Euro to Pound Sterling exchange rate today: 0.8420
- The Pound to Dollar exchange rate today: 1.3172, down 0.40%
- GDP data shows economy surprisingly strong in lead up to EU referendum post-referendum shock
- Nationwide house price growth steady in July despite Brexit vote
- Bank of England expectations are why GBP is being sold
The British Pound is under notable pressure at the time of writing as investors continue to focus on the August fourth Bank of England policy meeting.
The GBP is down against the Dollar which is itself struggling following the announcement by the US Fed that it would not be rushed into raising interest rates.
According to one analyst, it is a matter of time before GBP/USD slips below 1.30, a move that will also likely spell further notable declines for the GBP/EUR.
"The GBP/USD bounced lower from 1.3248 as traders sold into the knee-jerk rally on the back of a wider monetary policy divergence between the Fed and the BoE," says Ipek Ozkardeskaya at London Capital Group. "The only fact that the FOMC refrained from refashioning its strategy post-Brexit gave the market enough conviction to short the sterling."
Ozkardeskaya says even if the Fed isn’t in a position to act by September, higher US rates will hit the market sufficiently soon, and:
"It is certainly just a matter of time before the sterling slips below the 1.30 level."
Strong GDP and House Price Data Ignored
Sterling is struggling despite news that the economy grew faster than forecast in the second quarter of 2016 and that UK house prices grew at a steady clip in July.
Nationwide's House Price Index for July grew 0.5%, well ahead of the decline of 0.2% that was forecast. This takes annual growth to 5.2%, well ahead of the 4.5% expected.
“This is the first month’s data following the EU referendum. However, it is important to note that, in constructing the index, we use data at the mortgage offer stage – this means any impact from the vote may not be fully evident in July’s figures, as there is a short lag between a buyer making the decision to purchase a property and applying for a mortgage," says Robert Gardner, Nationwide's Chief Economist.
The first estimate of GDP for the second quarter of 2016 also comfortably beat expectations confirming the UK economy hardly blinked despite the uncertainty created by the lead up to the EU referendum.
Quarter-on-quarter GDP rose by 0.6%, well ahead of the forecast 0.4%, this took annualised growth to 2.2%, ahead of forecasts for 2.0%.
While recent business surveys have been fairly downbeat, the hard data available so far have been much more encouraging.
The British Pound traded within recent ranges against both the Euro and Dollar following the release of the data.
Most analysts had expected the data reading to be relatively strong - a ‘last hurrah’ for the UK economy ahead of the vote to exit the European Union.
It is for this reason that the impact on Pound Sterling is likely to be limited.
"Chancellor Philip Hammond will be fully aware that the Q2 numbers released July 27th only includes a week of data following the historic vote to leave the EU, and much has changed since," says Dennis de Jong, Managing Director at UFX.com.
de Jong comments further that many observers have been troubled by UK PMI data released since Brexit and all eyes will be on consumer confidence figures tomorrow to see if the resolve of the British public has been hit following Sterling plummeting to 30 year lows against most major currencies.
That said, the strong showing in the Q2 data could help soften any post-referendum blow to activity.
Lifting the data was a strong input from industrial production which rose 2.1%.
"Clearly the devaluation of sterling has had a material effect upon the demand for goods, with the production sector growing by its best quarter in years. There is reason to believe that the longer we see sterling in the doldrums, so manufacturing and overall production will benefit, helping rebalance the economy over services sector reliance," says Joshua Mahony at IG.
"The comparatively strong outturn for Q2 points to some compensating weakness in Q3 GDP overall," say Lloyds Bank in response to the numbers.
On the basis of the very early evidence for July so far, Lloyds say they expect GDP growth to stagnate over Q3 and likely over the second half of the year.
Note, that there is no mention of negative growth in their assessment.
However, analyst Sam Hill at RBC Capital argues that the cushion may not be as substantial as others assume.
RBC's reading of the data suggests that within the second quarter there was in fact a notable slowing down in activity - i.e the start of the quarter enjoyed solid economic activity while the end of the quarter experienced a sharp slowdown.
"Whether one looks at the downward trend in growth over the last few quarters or the intra-quarter slowdown in Q2 confirmed today, or last week’s ‘flash’ PMIs from Markit, it is difficult to argue against a loss of momentum in the UK economy," says Hill.
For Sterling, the big event remains the Bank of England's August meeting at which an interest rate cut is expected to be delivered.
Expect any strength to be sold in the run up to the event.
Bank of England is the Only Game in Town
Despite the strong data, Pound Sterling continues to be sold off and we expect it to test the bottom of its post-referendum ranges over coming days.
This reflects that investors believe that, regardless of the economic statistics, the Bank of England will cut the basic interest rate to 0.25% in August.
A good deal of GBP selling will also likely be on the basis that investors are expecting the Bank to potentially increase the quantitative easing programme.
In July, the Bank's MPC sent out a strong signal that additional easing is likely to be announced in August. Chief Economist Andy Haldane recently said that a ‘package’ of measures will need to be delivered ‘promptly as well as muscularly’.
Then, this week, one of the biggest obstacles to further rate cuts, Martin Weale, switched sides and said he believed a rate cut was now warranted.
As a result, analysts at ING say their base case for the August MPC meeting is: (1) a 25bp rate cut; (2) an initial £50bn expansion of QE asset purchases (mainly conventional gilts); and (3) the announcement
of further credit easing initiatives such as the Funding for Lending Scheme (FLS).
Most in the market now appear to be expecting similar measures, and in such an environment, it is nigh inconceivable that Sterling will find any support.