Business Hub

Sunday 18 February 2018

Daily Market Update: Sterling enjoys relief rally as BoE stands pat, for the time being at least

The Bank of England. Photo: PA
The Bank of England. Photo: PA

Simon Barry

Business as usual activities, including this commentary, feel entirely inconsequential and trivial this morning relative to the scale and form of the devastating loss of life arising from last night’s horrific terrorist attack in Nice. We extend our deep heartfelt condolences to the people of France and all others affected by the shocking attack.

For what it is worth, the main point of interest for markets over the past 24 hours or so has been the decision by the Bank of England not to change its policy stance following the conclusion of its July meeting, the outcome of which was released yesterday.  This was a meaningful surprise to markets which had come to assign a significant probability to a rate cut scenario, with about 19bps of a rate reduction priced in to UK interest rate markets ahead of the meeting.  Disappointment at the lack of action triggered upward pressure in UK market interest rates as well as the pound’s value on the fx market.  Notably, sterling is up about 1% against both the euro and the pound as the presumed loosening of monetary policy failed to materialise.  These gains for the UK unit leave Eur/GBP opening at 83.25p this morning, having briefly traded below 83p overnight.  Similarly, GBP/USD reached as high as $1.3480 overnight, and opens at around $1.3370 in early European trading. 

Having plunged to post-referendum lows of 86.3p and $1.28 against the euro and dollar respectively, sterling has now enjoyed something of a mini-rally over the past week or so, helped by some easing in domestic political uncertainty as well as some easing in the shock effect of the referendum result.  Relative to where it was last Friday morning, this mini bounce has taken sterling about 2.3% higher against the euro and about 3% higher against the pound.  However, we are not convinced that the pound’s recovery is set to endure as we look to the weeks and months ahead.  For one thing, uncertainty – both political and economic – remains extremely high notwithstanding the faster-than-initially-expected changeover in PM.  And for another, it is very clear from yesterday’s meeting minutes that the Bank of England will be easing its policy stance in the very near future.  Indeed, the minutes were explicit in stating that “most members expect monetary policy to be loosened in August”.  It appears that the committee merely wanted to give further consideration to the extent and composition of future easing measures in the context of its updated forecast which will be available for its August meeting which takes place in a mere three week’s time. So we are inclined to think that yesterday’s price action was mainly a temporary relief rally, amplified by a market that was short the pound.  While further modest upside can’t be ruled out in the very short term, we think that the pound is likely to come under renewed downward pressure, likely resulting in new post-referendum lows against both the euro and the dollar in the period ahead in our view.

Chinese data released overnight were generally stronger than expected.  GDP growth picked up to 1.8%q/q in Q2 from 1.2% in Q1, an outcome which resulted in stable y/y growth of 6.7% - slightly ahead of forecasts for a deceleration to 6.6%.  Industrial production and retail sales growth were also better than expected, with the pickup in sales growth to 10.6% in June from 10% in May consistent with a welcome ongoing rebalancing of economic growth towards consumer spending.  While these figures help contain concerns about near-term growth risks, the medium-term outlook for China remains subject to clear downside risks as the authorities continue to face the big challenge of engineering a soft-landing in an economy going through major structural changes.

At home, yesterday saw the release of the preliminary results of the 2016 Census of Population.  Following the distortion-laded national accounts release earlier in the week, the straight-up simplicity of the results of the Census was very welcome indeed.  The figures highlight the solid underlying demographics at play in the Irish economy.  The population is estimated at 4.758 million in April this year following expansion of ca. 170k, or 3.7%, in the 5 years to 2016.  For reference, this is over three times faster than the 1.1% increase seen in the EU over the same 5-year period. Population growth varied widely across the country ranging from a high of over 8 per cent in Fingal to a low of -1.5 per cent in Donegal. Among the fastest growing counties were the four administrative areas of Dublin, along with the commuter belt counties of Meath, Kildare and Laois and the cities of Cork and Galway.  While most counties experienced some level of population growth three counties witnessed population decline over the five years: Donegal (-1.5%), Mayo (-0.2%) and Sligo (-0.1%).

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