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What Does The Year End Hold For Sterling?

In my last article in October, carried away by the continued strength of the economic releases out of the UK and the fact that the Bank of England’s forward guidance appeared out of date before the ink had dried on the paper it was printed on’’, I hinted that Eur/Gbp could test .8000 before year end.

So am I changing my mind? Only on the timing! I still feel that Sterling will test .8000 early in 2014 but for year end I feel we will have to be satisfied with more modest gains.

Economic Releases

If anything my argument for sterling strength has been reinforced over the last six weeks – the labour market is strengthening, it has created 400K jobs since the start of the year and the pace of growth appears to be accelerating with 177K jobs created in the quarter to the end of September. The unemployment rate has fallen to 7.6% edging closer to the Bank of England’s 7% threshold causing Mr Carney to revise the Bank’s forecast of when this threshold (note, not trigger) will be hit from Q4 2016 to the end of 2015 with a two-in-five chance of hitting this level in 2014.

Unemployment Rate

Unemployment Rate

 

The Manufacturing & Services PMIs support this more optimistic outlook, with the Services PMI for October coming in at a heady 62.5 against an expected 59.8. The Manufacturing PMI registered a reading of 56 against an expected 56.1 for October showing UK exports rising at their fastest rate for two years.

Against this backdrop, the Bank have upped their forecasts for growth for this year to1.6% from 1.4% and expect annual growth of 2.8% in 2014 up from Augusts’ forecast of 2.5%. All of this has caused many in the market to speculate that the Bank will have to raise rates form their current record low sooner than had been suggested.

Some committed Sterling bears point out that while the return to growth is welcome, they question the durability of the recovery. They say that growth is narrowly based around a London (South East) centric housing market that has been artificially boosted by the Government’s ‘’Help to Buy’’ program. My answer to that is that growth has to begin somewhere and the presence of growth in the economy will entice both investment and demand led growth in 2014.

Barring an unexpected external shock to the world economy, the UK economy seems set to enjoy robust growth for 2014. This is in sharp contrast to the Euro area where recent economic releases paint a picture of low single digit growth at best and a return to recession at worst for the next year.

Why not .8000 by year end?

No logical reason except that the ex-trader in me says that we lack the volatility and momentum in the FX markets for such a move over the course of the remainder of the trading year. I believe we trade a range for December, with the top of the range at .8510 and the bottom at .8280. The risk to this forecast I feel is to the downside, with a break of .8280 perhaps yielding .8200 for you Sterling sellers.

As FX forecasting is challenging at the best of times, I am always keen to hear alternative views so please use the comment box below to share your thoughts and ideas on the UK economy and the Sterling exchange rate.

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3 Responses to What Does The Year End Hold For Sterling?

  1. DT November 26, 2013 at 5:33 pm #

    Surely that’s a rock solid case for lower Eur/Gbp and the 80p level to be a possibility sooner rather than later. Yet, the market doesn’t seem to want go there. Is it a case that too many investors bought euro at higher levels and are somewhat reluctant to sell it at the moment? Would this have an impact on the market? Something is giving Euro it’s strength and it doesn’t appear to be Economic data!

    • Eamonn O'Connor November 27, 2013 at 9:51 am #

      DT – Sorry for not reverting sooner, my own opinion is that it is more likely the continuous unwinding of the very large short € positions built up over the last two years of the Euro crisis that supports the single currency. Over time as my article indicates I would expect the economic outperformance of the UK relative to the Euro Area to drive the Eur/Gbp exchange rate.

  2. Shane November 27, 2013 at 5:46 pm #

    Great article!

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