Pound Sterling: A Tale of Consolidation; But the Longer-Term Outlook Remains Bullish
- Written by: Gary Howes
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The British pound (GBP) has entered into a period of consolidation this week with a lack of domestic data ensuring any steady advances remain hard to achieve.
Wednesday saw weakness while Thursady saw the UK pound make a comeback trading higher against the EUR and USD - this in keeping with a stronger performance delivered on the Tuesday session.
The net result? Very little change. Strong gains against the AUD were perhaps the standout of the week owing to data that showed Australian inflation data is easing back.
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Bank of England Minutes Fail to Boost GBP
Driving the British pound exchange rate complex on the domestic front today are the Bank of England MPC minutes from the April meeting.
UK policy makers stated that the UK recovery is strengthening with growth expected close to 1% in Q1 and Q2 of this year.
The BoE said there is only “modest rebalancing toward investment” in line with IMF concerns and this could explain some of the weakness we are seeing.
All participants voted for unchanged policy rate at the historical low of 0.50%. Softer GBP is clearly in favor of exports and foreign investment moving forward.
Lloyds Bank say stretched positioning could be aiding the pound's underperformance at present:
"The MPC minutes also seem unlikely to deliver any surprises, as at the time of the last meeting the unemployment rate was above 7.0% so the MPC were still constrained by forward guidance. However, the significant long position in GBP reported in the CFTC data also suggests that there are increasing risks to GBP on any negative news."
Sterling to Aus dollar: GBP up as Aussie inflation slumps
The Australian dollar is today's under-performer owing to the release of below-par inflation data.
Consumer Price Index (YoY) (Q1) came in at 2.9%, below calls for 3.2%. Markets are thus re-adjusting their holdings of AUD as they see less pressure for the RBA to act and raise interest rates.
Pound to euro exchange rate sinks as EZ flash PMIs provide boost
The euro is rallying today and extending gains against the USD.
Yesterday saw the pound advance against the euro but the EUR is back on the front foot on Wednesday.
German Markit Manufacturing PMI (Apr) beat expectations coming in at 54.2, beating consensus expectations for 54.0 and up from last month's 53.7.
German Markit Services PMI (Apr) smashed expectations by coming in at 55, markets had only expected 53.4.
Outlook favours firm GBP BUT beware short covering
Commenting on the fundamental and technical outlook for the British pound (GBP) exchange rate complex today is the team at Lloyds Bank Research:
"GBP/USD remains well supported and may have been helped a little yesterday by M&A speculation, though in practice this probably involved no real flow but rather just helped support sentiment.
"GBP/USD remains well correlated with yields spreads and the most recent UK data has encouraged a modest widening of spreads in favour of GBP, supporting the latest push above 1.68.
"More difficult to judge from here is the likely performance of EUR/GBP, partly because of today’s Eurozone flash PMIs, but also because the 0.8150-0.82 area in EUR/GBP was a significant base in February, and EUR/GBP has been less simply correlated with yield spreads, as the EUR has benefitted from capital and current account inflows.
"Given the long positioning in GBP and the probable lack of GBP specific news, we would expect EUR/GBP to hold above February lows unless there is a clear deterioration in the Eurozone data."