Sterling once had a more than fair run against the dollar, yet it is expected that it will not last any longer. The pound has risen to a five-year high on rising expectations of an untimely U.K. rate rise and a more peaceful comments from the Fed. With the events on either side of the Atlantic is bound to upset the consensus.
To start, the rather optimistic news around is the British economy which is already reflected in the exchange rate that there is a lot of upside last summer while the dollar was being traded at 1.50 to the pound. It was up 1.68– a 14 % appreciation since July of last year when the air was considered thin.
This however, was not the comment on the U.K.’s short-term prospects, although some positive indicators point to Britain’s growth sales may ease up slightly in the second half of this year with hefty industrial growth and retail sales remain irrefutably strong. Moreover, the same is on track to record growth of approximately 3 % this year which is considered quite fast for any developed economy.
Presently, currency markets are feeding off this kind of short-term, high-frequency data which often is an bar of longer-term factors. Moreover, markets are becoming increasingly complacent in its move in the coming weeks while the Fed’s pursuit of a lower for longer interest policy will maintain the dollar in check, despite several factors may shift to that perspective.
Possibly, the most pivotal in both Britain and the U.S. is the growth in terms of wages. Investors predict a constrictive labour market in the U.K. to fast track wage inflation and force the Bank’s Monetary Policy Committee into next year’s rate hike. This position misses vital shifts in the labour Market and the number of people re-entering the workforce along with the expanding proportion of part-time workers as well as record levels in self-employment.
That view overlooked pertinent shifts in Britain’s labour market and by looking at the number of people being re-deployed in the workforce with none of these aforementioned groups having intensive bargaining power in order for wage growth not to be well pronounced.
Other factors of concerns regarding the recovery such as skyrocketing household debt and the absence of an export-led economy, the coming months appears to be more likely a moment for the bank to finally make its move.
In the U.S. by contrast, the alterations in structure in the labour market may possibly drive the Fed in the opposite direction. With several economists having proposed the U.S. participation rate having declined permanently and not just as a result of a momentous downturn which in turn should sustain higher wages notwithstanding other things being equal.
The U.S. is likewise taking pleasure with better macro-economic data, whereas credit conditions there appear to be much better than in the U.K. and while the same current account has been expanding, the U.S. is tapering thanks to a lower foreign energy cost as it produces shale gas.
At present, the dollar is being subdued, the Fed is thrust back on the market pricing early and more aggressive rate tightening is being practiced. Ultimately only the data will settle on the finality of things. The Fed is spearheading the race that no central bank wants to front which is raising interest.
The instance wherein a fall in the pound against the dollar is more than a move on a relative yield, however and at some point currency markets will begin taking note of longer term issues bearing on the U.K. economy.
The markets have possibly failed to put a fair price in the probable effect of government cuts over the course of several years. Albeit the talk of austerity in Britain, few investors are very much aware of plans to double the rate of fiscal tightening in the coming year. Moreover, cuts in the next two years will possibly be thrice this year’s current level.
Yet the most cause for concern is the position of Britain’s trading account. It is difficult to see how a nation can go on in its respective account deficit equivalent to 4 % of the total GDP and not be able to perceive a substantial currency depreciation at some point, specifically since the discrepancy has long been so unrelenting.
Britain may have had same-sized present account deficit in flourishing times as the economy takes in consumer goods. However, it has never been considered so large during times when consumer demand has been held back.
The household debt likewise remains unsustainably high while the U.K.’s fiscal deficit still remains among the biggest in the first world nations. None of this seems likely to change any time soon, but so far it has been concealed by short-term data.
Finally, at some point it is expected that the market will be shifting its focus towards these abovementioned longer-term issues and the timing of the switch could bring about the most anticipated change of the sterling this year.