Carney and the Pound

The pound bucked the trend through the Asian session this morning, managing to keep ahead of the Dollar with gaining 0.20% ahead of the European open, despite the Dollar Spot Index’s 0.09% rise through the session.

The pound failed to hold onto early gains on Tuesday despite a surge in UK manufacturing output in December, the Dollar continuing to rule the roost, though we expect sentiment towards the pound to improve through the day should this morning’s December Construction PMI improve in December, the markets likely to begin discounting the BoE’s negative sentiment towards the UK economy going into the 1^st quarter.

The BoE had raised concerns over the outlook for the UK economy going into the New Year, whilst also seeing inflationary pressures easing, leading to a shift in market sentiment towards the BoE’s monetary policy outlook, a build-up of inflationary pressure likely to be the sole reason for the BoE to reverse August’s rate cut decision over the near-term, which had led to upside for the pound in November following the BoE’s forward guidance that rates are as likely to go up as they are down in the coming months.

If the latest manufacturing PMI figures are anything to go by, the weaker pound is expected to continue supporting demand for UK goods and services over the near term, while inflationary pressures are likely to remain the key risk to the UK economy ahead of the British government invoking Article 50, without wanting to discount the outcome of the Supreme Court ruling this month on whether an Act of Parliament is required to enable the government to invoke Article 50 at the end of March, such a decision another positive for the pound, easing the prospects of a hard-Brexit.

The BoE has got it wrong before and there’s no reason why they can’t be wrong again, upbeat stats out of the UK this morning, ahead of tomorrow’s service PMI numbers, suggesting that the UK economy is likely to continue to perform in the early part of the 1^st quarter.

With the pound up 0.28% at $1.2260 at the time of the report, there’s still a way to go for cable to recover to the year-end close of $1.2340, but with no material stats out of the U.S scheduled for release ahead of this evening’s release of December’s FOMC meeting minutes, cable will certainly have a run with the markets needing to consider the possibility that a collapse in the UK economy is overhyped ahead of the post Article 50, 2-year negotiation period, evidence to date suggesting that resilience is likely to persist, despite continued confusion over the terms on which Britain will ultimately exit the EU.

The irony is that the decision by the BoE to ease monetary policy in August of last year was based primarily on a marked deterioration in July’s private sector PMI figures, with the manufacturing, construction and services sectors contracting in the wake of the EU Referendum. The December manufacturing PMI sits at a 30-month high and should the construction and service sectors see similar accelerations in productivity and new orders, it may be hard for the BoE to ignore, let alone the markets, cable outperforming its peers with the Dollar Spot Index up 0.04% at the time of the report.