GBP: Follow through? - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, today, the focus of the pound will be firmly back on economic fundamentals and specifically the degree of hawkishness from the BoE at today’s policy meeting.

Key Quotes

“This will be particularly interesting given the mixed signals from recent economic data.”

“The vulnerability of the UK consumer sector is most clear in retail sales and consumer confidence series. These have been under pressure despite the broad uptrend in UK economic growth.  This morning’s publication of UK February retail sales produced a better than expected outcome of 0.8% m/m.  However, this was accompanied by a downward revision to the previous month’s number and followed a series of sickly data.   The commentary from the Office of National Statistics (ONS) pointed out that “the underlying three-month picture is one of falling sales, mainly due to strong declines across all main sectors in December”.  That said, some reprieve may be on the way, given the improvement in wage growth.”

“In January UK average weekly earnings rose by a better than expected 2.8% 3m y/y. The number was the highest print since 2015.  That said, it remains stubbornly low compared with previous economic upturns.  The BoE are optimistic that current tight labour market conditions will result in firmer wage data.  In February the MPC stated that “a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates”.  However, the commentary from the ONS is less convincing.”

 “There is no strong expectation that the BoE is poised to hike rates today. However, the commentary provided will be instrumental in illustrating how the MPC is reconciling recent economic publications with its hawkish outlook.  Currently the market is strongly priced for a 25 bps rate hike in May with a good chance of a follow on move by the end of the year, in line with our view.  This week’s announcement of an EU/UK deal on the Brexit transition increases the risk of a second move this year.  That said, if EU/UK trade talks are stalling in the autumn or if a decided upturn in wage inflation fails to manifest, the Bank will likely find it difficult to pull the trigger in November.”

“With a May rate hike almost fully priced in and the market having already celebrated the Brexit transition deal, we would expect further near-term gains for GBP to be difficult.  We continue to look for a move back to EUR/GBP 0.89 on a 3 mth view on the assumption that the start of EU/UK trade talks will throw up fresh political hurdles.”