Fundamental Analysis: Pound Bounces After BoE’s Surprise Positivity

Fundamental Analysis: Pound Bounces After BoE’s Surprise Positivity

The pound sterling bounced significantly against most major currencies yesterday afternoon. The upward correction by GBP came in the aftermath of the Bank of England’s meeting, which revealed surprisingly balanced comments from the Monetary Policy Committee. The committee also reiterated its commitment to ‘gradual and limited’ rate hikes.

This jump by the pound was almost immediately after the start of the meeting when the BoE’s Governor Mark Carney set his balanced tone. Sterling made a dramatic upward movement to test $1.30 again. GBP also gained to below 87.5 pence to the euro and significantly above the key area of ¥142. Gains were short-lived, though, with the pound's decline having resumed today although at a slower pace.

Spending and inflation on target but Brexit a concern

Most analysts and many traders had expected Dr Carney to paint a picture of doom and gloom yesterday afternoon. The unusually poor result from that morning’s house price survey by Halifax compounded matters, coming in with a 2.9% decline against the expectation of only half a percent.

These factors made the initial comments at the MPC’s press conference all the more, positively, surprising. Dr Carney pointed to the British consumer’s ‘historic resilience’. He also stressed that consumer spending in the UK is a major ‘upside risk’ to the central bank’s rather gloomy forecasts.

The governor also commented on expected slower growth being temporary under the ‘fog of Brexit’. Growth, he asserted, is likely to pick up significantly once the UK’s eventual situation becomes clear. The biggest surprise came when Dr Carney noted that quick removal of uncertainty is a scenario being considered seriously by the MPC. This, he claimed, could see annual growth nearly half a percent higher than current projections.

Politics and data in view next week

Monday next week is an immensely important day for British economic data. No less than nine key releases are due at 09.30 GMT. The most important of these are Q4 GDP (last figure 1.5%) and business investment (last figure -1.1%; estimate 0.2%), plus non-EU trade balance for December (last figure -3.93 billion; estimate -3.7 billion).

The pound is likely to be highly volatile around these releases until the markets can digest whether there is an underlying theme in the data. As important as data, though, is the news from the British government on Brexit. This has major potential to cause volatility and possibly a full reversal for the pound from its recent losses.

GBP likely to extend gains somewhat

Considering fundamentals on the whole, Exness’ analysts expect the pound to continue making small losses into next week. Next week’s movements are less clear and likely to be determined by Monday’s bumper crop of data.

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