There’s been further downside seen in the pound this morning, with the currency falling to its lowest level since mid-March against the US dollar on what is essentially a shifting of views on future monetary policy on both sides of the Atlantic. The pair is set for a 6th consecutive daily decline and the outlook for many is now quite different compared to this time last week when the pound was at its highest level since the day after the Brexit vote in 2016.
Sterling bulls under pressure
This fairly dramatic reversal in the pound has largely been caused by the market being caught wrong-footed as far as UK rate hike expectations are concerned, with Carney’s comments last week dispelling the notion that a further increase next month is highly likely. The bank may well proceed with a May hike, and if they do then this would now be more supportive of sterling given that the market has grown more sceptical as to the chances of this occurring. However, should they stand pat the bullish case for sterling will be left looking fairly flimsy.
Seasonality failing to boost sterling
April has traditionally seen strong positive seasonality for the pound, with capital inflows into Britain from foreign firms paying dividends to UK shareholders, but this has failed to support the currency of late, with the GBPUSD rate now lower than where it began the month. Should the pair end April with a negative return then it would break a run of 14 consecutive years in which it has gained.
US yields near 4-year highs
Whilst it is tempting to focus on this from a UK perspective the impact of recent developments in the US shouldn’t be overlooked with government bond yields across the Atlantic on 10-Year notes near 4-year highs, and on the cup of 3%. Higher US yields are seen as supportive of the buck and with inflation expectations receiving additional support from the Oil price - which is currently at its highest level since 2014 - then there is a growing possibility that we get a faster pace of tightening from the Fed.
UK government borrowing falls to lowest in over a decade
Government borrowing has dropped to its lowest level in 11 years according to the latest set of official figures as the public purse strings continue to be tightened. According to the latest figures from the ONS, borrowing fell by £3.5B to £42.6B in the last financial year - largely thanks to a £1B decline in interest payments and a £1.4B reduction in Local Authority borrowing.
Drops in public spending are often seen as a sign of economic strength, but this isn’t really the case here with it being more an example of the government sticking to its guns as far as austerity programme is concerned, despite relatively low levels growth. 2017 saw the UK lag the global recovery in growth with GDP coming in at 1.7% - the lowest level since 2012 and below many of its peers. The first estimate of Q1 2018 GDP will be released this Friday with a fairly sluggish 0.3% increase Q/Q expected.