Sterling managed to shrug off mediocre UK growth data on Tuesday and, after a short-lived dip against the US dollar immediately after the GDP release, swung back up towards two-month highs.
Sterling's gains on Tuesday primarily reflect the dollar weakness as markets anticipate meager US macro data will lead to a more or less dovish Federal Open Market Committee (FOMC) statement. Weaker activity in the US services sector, published by data compiler Markit on Monday, added to concerns that the US economy may have not picked up in the second quarter as much as was expected.
"The Federal Reserve is not expected to change monetary policy but US Dollar bulls can't help but worry that the central bank will take June tightening off the table," Kathy Lien, Managing Director of BK Asset Management, argued in her daily FX comment on Monday.
Lien added that "... the string of disappointments in U.S. data and is driving the dollar lower by causing investors to position for a more dovish FOMC statement. Between a slowdown in manufacturing and service sector activity along with the weakest pace of non-farm payrolls growth since December 2013, there’s no doubt that the recovery lost momentum over the past month."
Traders also appeared to have ignored the first reading of the UK GDP as the headline quarterly measure is a kind of backward looking variable, is based on less than 50% of all the data available, and includes only the output side of the GDP.
Also, figures released by commercial forecasters and business data compilers are a bit more upbeat and may suggest the official figures on the first-quarter growth could be revised upwards in either second or the final GDP estimate, due in the upcoming two months.
In their 'FX Strategy' report released on Tuesday morning, strategists at BNP Paribas (PARIS:BNPP) said they remained "bullish on the GBP longer-term as we suspect rates markets are under-pricing the path of BoE easing, which was noted in the MPC minutes last week. With political scenarios still uncertain however, it’s probably prudent to remain cautious until after the May 7 general election."
The April MPC minutes revealed the Bank of England (BoE) turned less dovish in April. It now sees the effect of sterling appreciation on medium-term inflation being stronger and faster. It expects inflation to pick up more sharply at the start of next year once the effect of cheap oil and food drops out of CPI calculations towards the end of this year, and the effect of sterling appreciation dissipates faster than estimated, thus paving the way for a rate hike around that time.
The BoE remained unanimous on its policy stance in April, although for two members the policy decision in April was "finely balanced". Despite CPI inflation remaining at zero, where it is highly likely to stay for the rest of the year, all the BoE policymakers "agreed that it was more likely than not that the Bank Rate would rise over the three-year forecast period".
Disclaimer: The information provided by WBP Online come from its Reporters and Foreign Correspondents and its third party suppliers ("Information Providers"). WBP Online believes its text services to be reliable, but accuracy is not warranted or guaranteed. This includes facts, views, opinions and recommendations of individuals and organizations deemed of interest.
Neither WBP Online nor Information Providers guarantees the accuracy, completeness or timeliness of, or otherwise endorses, these views, opinions or recommendations, gives investment advice, or advocates the purchase or sale of any security or investment.