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GBP has entered a year of doubts - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 11, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that according to the latest Reuters BoE Monetary Policy poll has indicated that the consensus is still expecting the Bank to announce its first hike of the cycle in Q2 2016.

    Key Quotes

    “Our call has been for the first hike in August, though the combination of weaker economic data in the UK coupled with possible political risk this year certainly has the potential to delay the first rate hike of the cycle beyond this date. In reflection of these risks, the BoE’s measure of the UK effective exchange rate has fallen by around 3.4% from its November high and we expect this index to remain on the back foot in the coming months.

    Over the past month UK manufacturing, construction, CPI inflation earnings data and the Q3 GDP revision in addition to public finances have all come in short of the mark. These disappointments have driven home the argument that the BoE need be in no rush to hike interest rates.

    Among the headwinds that face the UK economy this year is continued fiscal austerity, uncertainty relating to the country’s future within the EU and pressure on the external sector caused by a relatively strong pound and relative weak growth in the Eurozone. As it stands the UK recovery is unbalanced and driven by consumer spending. Although the recovery in employment in recent years will have underpinned consumer demand, the increased use of credit is also a factor.

    The UK has also made use of macro-prudential constraints, though these measures have been aimed at tempering the build-up mortgage debt. Even with these measures UK credit demand is rising and increased levels of debt makes the economy more vulnerable on any rise in unemployment. Although higher interest rates would likely rein in the pace of consumer borrowing, it would also place addition downside risk on inflation expectations and, in our view, this likely rules out a BoE rate hike before Q3 at the earliest.

    The BoE has been forecasting higher rates of CPI inflation in the months as the impact of last year’s rapid fall in oil prices drops out of the calculation. However, commodity prices remain very low suggesting that headline inflation is set to remain below target for an extended period. Perhaps, more worrying than the trend in headline CPI is the fact that core inflation remains moderate despite the growth in employment and credit. This suggests that the follow through from the increases in earnings power into demand has faltered.

    Through a large part of last year sterling was riding high on anticipation that the BoE would be the next G10 central bank to follow the Fed’s rate hike. This may still be the case but as the market waits for the Bank to make its move, interest rate differentials could push cable to 1.44 later this year. EUR/GBP may still edge towards 0.70 this year on the back of a dovish ECB, but UK political risk related to EU membership has the potential to lift volatility and may whack GBP hard.”
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