Pound Will Remain Weak Vs Dollar
The Fed is ahead of the Bank of England in its plans to raise interest rates as the latter learns the “art of patience”, say IG analysts
The U.S. Federal Reserve will raise interest rates first as the Bank of England (BoE) learns the “art of patience”, meaning there is further Sterling weakness ahead versus the U.S. dollar, according to IG group analysts.
Chris Beauchamp, senior market analyst at IG Group, said at a press event today that despite the lack of clear guidance on monetary policy, the pound has hit a multi-year trade weighted high. However, it’s another story versus the USD. The ETFS Short GBP Long USD UCITS ETF (USD2) has returned over 17 percent in the past 12 months, according to Bloomberg data.
There has been a steady rise in UK earnings and unemployment has fallen, Beauchamp said, but low productivity will hamper the economy. He added that interest rates might not be raised until next year, and the Fed will raise rates first.
“People have been predicting higher inflation for six years since the launch of [UK] quantitative easing and that is yet to materialise,” he said. “Nonetheless the BoE has learnt the art of patience over the last six months and does not have to rush to raise interest rates.”
UK inflation slipped into negative territory of minus 0.1 percent in April, the first move of its kind in over 60 years. The BoE might also wait to view the results of the planned EU referendum in 2017, he said, before making any decisive moves.
“The broader dynamic is that the pound will remain weak versus the dollar: that is one rally that still has a long way to go,” said Beauchamp.
Beauchamp said the lows of 2015 at around $1.45 look to come around again from around $1.52 today. This would not necessarily hurt the economy as it would boost the competitiveness of UK-based exporters.
But versus the euro, there is a case for further GBP strength, as diverging monetary policy will drive down the EUR/GBP exchange rate, even if Greece boosted the single currency by leaving the Eurozone.
Alastair McCaig, market analyst at IG, added that a Grexit is the most likely event in the near term compared to Scotland leaving the Union or the UK leaving Europe.
