Echoes of last week's speech by Mark Carney as well as this week's macro fundamentals and the Conservative Annual Conference are set to determine the sterling curve this week.
The pound has been under downward pressure against the US dollar in recent weeks relative to the last twelve months. This has been due to a moderation in some fundamental macro data and uncertainty surrounding political developments following the Scottish referendum and the general election in May next year.
Sterling received some support and corrected some of last week's losses after Bank of England (BoE) Governor Mark Carney gave a more or less hawkish speech on Thursday last week when he said the base interest rate would begin to rise despite future uncertainty.
Analysts from Societe Generale Cross Asset Research suggested in their note to clients that they expect "a first hike in November, followed by a 25bp per quarter pace of hikes in the following year." Other market participants expect the first hike as early as in November or as late as in February 2015. Much on when the first rate hike comes will depend on both the hard and soft data in the upcoming months.
This week's attention will be focused on the third estimate of the UK's gross domestic product (GDP), the Conservative Conference and Purchasing Managers' Index (PMI) reports from Markit in the second half of this week.
Even though the final GDP estimates rarely bring any surprises, this time the final estimate differs from the previous GDP releases.
Due to changes to UK National Accounts, the second estimate did not include any data on the expenditure side of GDP - the data will only be included in final estimate. Therefore, markets may expect a surprise if the data on the expenditure side are strong enough to push the headline quarterly figure upwards, from the current reading of 0.8% quarterly growth in the second quarter.
The Conservative Party annual conference has also been watched closely. Chancellor George Osborne pledged today less taxes and more spending cuts.
Osborne said his party plans a further £25 billion in permanent spending cuts and savings in order to eliminate fiscal deficit. The chancellor reiterated that there should be less spending than more taxes to achieve that goal. Second, Osborne further pledged a two-year freeze in social benefits for the people of working age which he said should save some £3 billion. Last week, Labour Party Shadow Chancellor Ed Balls also sketched some of the shadow budget fundamentals.
The second half of this week will continue to determine sterling's curve with PMI data to show if the UK economy manages to keep momentum as it enters the final quarter of this year. Business activity in the robust services sector and construction are expected to moderate slightly in September, while the manufacturing PMI is expected to remain broadly flat.
These PMI expectations are broadly in line with the BoE’s estimates suggesting a tentative slow down towards the end of this year. But we should bear in mind that a slight moderation in the PMIs comes from the record highs seen earlier this year.
Overall, the stronger the PMIs and the upcoming macro data, the earlier the prospect for the first hike of the BoE's base interest rate, given the numerous references from top BoE officials to data-driven policy decisions in the upcoming months. Regarding sterling versus the US dollar, much will also depend on the Federal Reserve's rhetoric on its policy moderation.
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