GBP bullish as it readies for first UK rate rise since 2007
The Bank of England is paving the way for a rise in UK interest rates – the first since July 2007 – placing the UK in an unusual position along with the US of being one of the few developed countries contemplating tightening monetary policy.
Though GBP's performance has been less than spectacular against the USD, it has held it's own across many of the the other majors. After all the central banks behind EUR, JPY and even other currencies such as AUD, NZD, CAD and CHF are all leaning towards differing degrees of monetary easing.
Though the never ending Eurozone crises, concerns over China, the commodity market meltdown and the recent stall in UK jobs creation are likely to moderate the BoE, it's members are nonetheless growing increasingly concerned over future inflationary pressures.
There are signs that pay rises are at last starting to show through. In the 3 months to May they were up 3.2%, though other figures have revealed more mixed findings. On top of that, the UK is significantly raising the minimum wage over the next five years. Meanwhile, the economy is generally performing well. Then of course there's the effervescent UK real estate market, which has led to many an economic bust. More expensive money might help temper it.
EUR/GBP – opposing monetary policies sees EUR grinding lower
Who will go first?
A key question to ponder is which central bank will raise first – the UK or the US? It's likely the Bank of England would prefer the US Federal Reserve to act first – after all it's unclear how much volatility will be unleashed by global markets when the rise happens, probably sometime after September. But markets have been given plenty of notice over the Fed's intentions.
Once the US has gone, the UK could follow 3-6 months later.
Certainly, this will favour GBP over other majors such as EUR and JPY, both of which have central banks in quantitative easing mode, but versus the USD the action is likely to be more choppy. One will rise versus the other depending on whose expected to raise interest rates next. Nonetheless, since April GBP/USD has managed a series of higher lows, which is potentially bullish.
However, this script could easily be ripped up by another bout of Eurozone nerves or should China, the world's second largest economy, be found to be suffering from something more profound and troubling than an economic slowdown.
By Justin Pugsley, Markets Analyst, MahiFX