MUFG: The GBP
The pound has been consolidating at close to year-to-date lows against the US dollar this week at just above the 1.3200-level. The pound has been supported this year by the resilient performance of the UK economy. There was further good news this morning when it was revealed that economic growth revised up by 0.1 ppt to 0.5% in Q2. It continues the strong start to the year for the UK economy which expanded by 0.6% in Q1. The BoE’s latest policy update also highlighted that the Bank’s staff are more optimistic now that stronger growth momentum has continued over the summer. They have raised their forecast for growth in Q3 to 0.4% up from their previous projection of 0.1% set back in July. Stronger growth will encourage the BoE to tighten policy soon if higher energy prices conte to prove more persistent. That was the clear message from BoE Governor Bailey last week who stated that "it’s getting harder to avoid rate hikes". A view shared this week by Deputy Governor Ramsden who stated that “were upside pressures on the inflation outlook to continue to build, there could be a case for increasing the bank rate”. He judges that risks to the inflation outlook are “more titled to the upsi
3200-level. The pound has been supported this year by the resilient performance of the UK economy. 5% in Q2. 6% in Q1.
The BoE’s latest policy update also highlighted that the Bank’s staff are more optimistic now that stronger growth momentum has continued over the summer. 1% set back in July. Stronger growth will encourage the BoE to tighten policy soon if higher energy prices conte to prove more persistent. That was the clear message from BoE Governor Bailey last week who stated that "it’s getting harder to avoid rate hikes".
A view shared this week by Deputy Governor Ramsden who stated that “were upside pressures on the inflation outlook to continue to build, there could be a case for increasing the bank rate”. He judges that risks to the inflation outlook are “more titled to the upside". The comments are consistent with our forecast for the Boe to begin hiking rates in November. The other main development yesterday in the UK was the keynote address from Prime Minister Andy Burnham at Labour's annual conference.
He announced plans to make major policy changes including: i) breaking the pensions triple lock link to earnings from 2030, ii) creating a national care service, iii) indicating a greater willingness to re-open the debate over the UK’s relationship with the EU, and iv) pursuing electoral reform to move away from a first past the post system in favour of proportional representation. He outlined three options he would discuss at the UK-EU summit scheduled for later this year: i) rejoining the EU, ii) rejoining the single market and iii) entering a customs union. It opens up the possibility for a potential reverse-Brexit trade for the pound in the future.
Plans for significant policy changes have also refuelled speculation that he could seek to hold an early election. Market focus will now shift to the upcoming Budget on 28th October which is an important event risk for the pound heading into year-end.