And I suspect I am not the only one that has had their view on Stg whip sawed by the Bank of England’s ‘’guidance’’. Mr Carney’s tenure as head of the UK Monetary Policy Committee (MPC) was supposed to herald a new era where the monetary authority provided the market with clear guidance on monetary policy. Even the most uninformed trader (and there are a few of those) would be able to say with some certainty when the Bank was going to adjust interest rates – such was the theory. In practice traders and market participants over the last two to three months have been whipped one way then the other when it comes to predicting when the first interest rate rise will occur.
The Mansion House speech
It all began with the Governor’s Mansion House speech, prior to that auspicious event, the Market had priced the first rate rise to occur either at the end of Q1 or the beginning of Q2, 2015. There was growing consensus from a broad range of market participants that the Market had correctly priced this first move in rates – this complacency was blown away when Mr Carney referred to the first rate hike in his speech and uttered these eight little words ‘’ It could happen sooner than markets currently expect’’. The market reaction was to bring forward their forecasts for an interest rate rise to Q4 2014 and to aggressively buy the pound. Stg was soon trading under .8000 against the Eur before eventually hitting a low of .7871 on the 23rd of July.
Softer UK data
Meanwhile UK data had began to soften, the key PMIs while still in strong expansion territory were off their peaks, inflation data was moving away from the Bank of England’s 2% target and sectors of the economy were flirting with deflation. At the same time the housing market was coming off the boil and most importantly wages growth was extremely weak. These data releases encouraged the market to change it’s view again and pencil in the first UK rate rise for Q1 2015. So all eyes were on the Bank of England inflation report presented by Mr Carney on the 13th of August for confirmation that the market was correct in it’s timing. Mr Carney didn’t disappoint and presented a dovish report that highlighted that average wages excluding bonuses grew by 0.6% which was the slowest rate of growth since records began in 2001. Mr Carney went on to say that that there are ‘’a lot of uncertainties to contend with ‘’ given record participation in the jobs market, ‘’ remarkably weak’’ wage rises and a rising number of threats to the global economy. The MPC also halved it’s forecast wage growth from 2.5% in 2014 to 1.25%.
Q1 2015 seemed like it was nailed on for the first rate rise! Or was it? Mr Carney in the Sunday Times on the 17th of August said that he would not wait for pay to catch up with the cost of living before putting interest rates up. Then three days later on the 20th of August the minutes of the last MPC monetary policy meeting were released, they showed that two members of the committee, Ian McCafferty and Martin Weale voted for a 25 basis point increase in rates.
So is a rate rise in Q4 2014 back on? Was it ever off the MPC agenda? At the time of writing the market is sticking to Q1 2015. Nobody can say that Mr Carney has not introduced some two way risk to the market!
What about Stg?
Having strengthened to .7871 against the Eur, the pound has steadily weakened to .8000 as I write. In my last blog I said ‘’ I am going with a range of .7750 to .8160 for Q3’’. With five weeks to go in the quarter I expect the pound to trade mostly above .8000 but not through .8160.
The reasons I feel Stg may experience some weakness are: (A) The economic releases are no longer beating markets expectations, in particular the key inflation and wage growth data has disappointed and these are unlikely to turn around over the next month or so.
(B) I believe the two members of the MPC that voted for a rate hike are outliers and without a sharp improvement in the economic releases, they will not be joined by other MPC members.
What are the threats to this view?
The Eur is trading weakly, if key supports were to give way against the Yen & the Usd then general Eur weakness could spread to the Eur/Gbp currency pair. If this was to happen I don’t see the Eur trading below the low for the quarter as previously mentioned at .7871. However this scenario poses a significant risk to my viewpoint and more importantly for those that are waiting to buy Stg on further weakness.
Of course the MPC could surprise us yet again at their next monetary policy meeting and all bets would be off. I can’t believe I am saying this but I hanker for the old days when forward guidance had yet to make it’s entrance to the financial markets lexicon.
Ignore my nostalgia and let me know when you think the Bank of England is going to raise rates and where you think Stg is likely to trade for the remainder of Q3?