It will take more than Mr Bean to push down GBP
The warning over too strong a currency hurting UK export performance by Bank of England deputy governor Charlie Bean was a reminder of how sensitive central bankers are over exchange rates – but longer term it will take more than verbal interventions to keep GBP down.
In the short- to medium-term GBP/USD should still be on course to reach 1.7000 and possibly even 1.7500 if risk appetites increase and the global economy continues its recovery.
From a fundamentals basis, the outlook is positive. Not least the Bank of England has ceased quantitative easing and the UK could become the first major developed country to raise interest rates – though New Zealand has already raised its rates.
The UK's economic recovery is far from perfect. Its manufacturing base remains far too small and there is a heavy dependence on the real estate market. However, the recovery does appear to be broadening, which suggests sustainability.
GBP/USD – should shrug off Bean's comments
….GBP's one serious Achilles heal
Possibly the biggest factor blighting GBP's prospects – and partly reflected in Bean's comments – is the UK's current account deficit. It's massive standing at a staggering 5% of GDP. That has happened despite years of flat domestic consumption and it is far too high at this point in the economic cycle.
The prospects for the UK improving its export performance are not entirely hopeless. The battered Eurozone is showing signs of a recovery and could soon be buying more from the UK. The UK's financial services sector is also looking more robust and services industries generally are exporting more.
Longer-term the size of the UK's current account deficit is unsustainable and remains a constant threat to GBP. It will either have to be addressed by policy makers while there's still time or market forces will eventually do it and that could be ugly.
The deficit leaves GBP looking very vulnerable to any return of widespread fear in the global markets. At the moment any number of events could trigger a stampede from risk. Such as a serious escalation of the Crimea debacle, a financial crisis in China, a big flare up in tensions in the Middle East or even a revaluation of the US Federal Reserves' attempts to exit its quantitative easing programme.
By Justin Pugsley, Markets Analyst MahiFX Follow @MahiFX on twitter