We saw the British pound suffer steep losses at the beginning of last week after a YouGov poll indicated a majority for Scottish independence.
By Peter Martin
Friday, September 19, 2014
News of a swing to the ‘No’ vote in polls last night and confirmation today that Scotland had voted to remain part of the UK initially resulted in gains for the pound, removing the uncertainty of how the pound might be affected by a splintered UK, and this helped push GBP/USD as high as 1.6525 earlier in the trading day. As attention switched back to the more conventional matters of the UK economy and the prospects for British monetary policy, though, those advances were reversed, pushing cable into negative territory on the day.
By mid-afternoon in New York, GBP/USD was down 0.58% or 95 pips at 1.6306, as currency traders look forward to how the direction of the Bank of England’s monetary policy might compare to the Fed, with speculation growing that the latter might be ready to act sooner in tightening than the former. The decline leaves the pound well down on the week against the dollar, a week in which the Fed revealed it sees a likely end to its stimulus at the next FOMC meeting and in which soft figures for average earnings growth have dented expectations for when the Bank of England might hike rates.
Labor market statistics released on Wednesday suggests the UK economy remains on a solid trajectory, with the claimant count for unemployment benefits dropping 37,200 in August, a similar-sized drop to that seen for July, and the fourteenth consecutive decline in this metric. It is tepid wage growth that may stay the hand of the Bank of England’s monetary policy committee though, with average earnings up just 0.6% year-on-year in August, which looks very slight compared with August’s CPI (released on Tuesday) which showed an annual change of 1.5%.
The Fed, meanwhile, said midweek that ‘If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting,’ its strongest signal yet of the intention to bring an end to its program of monetary stimulus. Though the FOMC statement said ‘it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends’, the Fed upped its forecasts for where it sees the federal funds rate at the end of next year, implying a faster pace of rate hikes for 2015 than previously anticipated. The median projection made by Fed officials back in June for where the federal funds rate would be by the end of 2015 was 1.125%, but this median forecast has now risen to 1.375%.
The Conference Board’s index of leading indicators moved up a modest 0.2% for August, though this was on top of July’s steep gains (originally reported as +0.9% but upwardly revised in today’s report to +1.1%). Building permits was perhaps the biggest hindrance on the composite index, reinforcing the notion that housing is likely to constrain economic growth in the third quarter.
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