Happy Monday!

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The week ahead

  • UK Prime Minister Boris Johnson has seen the Conservative Party gain in polls in recent days, just over one month out from the snap general election on December 12.
  • Neither the Q3’19 UK GDP report nor the October UK inflation report (CPI) are likely to stir much confidence in the Pound.
  • The British Pound has a mixed trading outlook.

Aside from Brexit, British Pound Economic continues to improve

The economic calendar should be watched over the first few days of the week, as there are several significant data releases between Monday and Wednesday. Kicking things off on Monday, the first revision to the Q3’19 UK GDP report will be released, where it is anticipated that the headline reading will be reduced from 1.3% to 1.1% (annualised). On a more positive note, the quarterly reading is due in at 0.4% from -0.2%.

But in general, UK economic data has rebounded since the start of November, at least when trying to look at economic data from an objective point of view. The Citi Economic Surprise Index for the UK, a gauge of economic data momentum, was up to 4.3 by the end of last week from -0.3 on the final day of October.

UK Inflation expectations rebound; Actual inflation lags

After Mondays Q3’19 UK GDP report, the forex economic calendar will turn to the latest UK jobs report on Tuesday then the October UK inflation report (consumer price index) on Wednesday. According to a Bloomberg News survey, the October UK inflation report will show that price pressures eased last month amid a sharp recovery by the British Pound as no-deal, hard Brexit fears dissipated; a strong domestic currency dampens import price pressures. Headline inflation is due to come in at -0.1% from 0.1% on a monthly basis and at 1.6% from 1.7% on a yearly basis.

Neither UK GDP nor CPI Report likely to make waves

There are two primary reasons why we should keep expectations low for the UK economic data due out this week: the Bank of England is unlikely to change rates anytime soon thanks to Brexit. Since the June 2016 Brexit vote, the BOE has tried to stay neutral to not appear political during the Brexit negotiations. Further reducing the likelihood of any action anytime soon is that the forthcoming policy meeting will not produce a new set of growth, inflation, and unemployment forecasts, collectively known as the Quarterly Inflation Report (QIR).

Bank of England interest rate expectations (November 8, 2019)

As such, rates markets are downplaying any chance of action from the BOE anytime soon, and as a result, UK economic data continues to carry less weight than data from other G10 currencies. Overnight index swaps are pricing in an 84% chance of a no change in rates at the December BOE meeting.

As higher levels of confidence are likely to translate into increased consumer spending hopes for fourth quarter economic activity naturally improved.

In the absence of any fresh UK data, meanwhile, the Pound struggled to find much in the way of traction against its rivals ahead of the weekend.

Improved UK Growth to Offer GBP/USD Exchange Rate Boost

The mood towards the Pound Sterling could improve on Monday morning, however, as forecasts point towards a recovery in the third quarter UK gross domestic product.

After the -0.2% contraction seen in the second quarter investors are anticipating a solid rebound in the quarterly growth rate, eliminating the risk of a technical recession.

Any deterioration in the UK growth outlook would lend further weight to bets that the BoE could cut interest rates sooner rather than later, dragging down the Pound in the process.

Lack of UK Inflation uptick set to drag on GBP exchange rates

While no change is expected from the headline UK consumer price index the Pound could still falter in the wake of the data.

If the monthly inflation rate fails to pick up from 0.1% to 0.2% as forecast this would give the BoE renewed cause for dovishness.

On the other hand, evidence that inflationary pressure picked up at the end of the third quarter may encourage investors to pile into the Pound once again.

Lingering political anxiety as markets continue to brace for the December general election could also see the Sterling-Dollar exchange rate sumble over the coming days.

 

If you have an upcoming currency requirement and would like to hear more about what is affecting the markets this week, please contact your relationship manager on 020 3876 5432