Is There Life For The GBP After The IMF?
On Tuesday, sterling traders initially didn’t really know which way to go. Sentiment on the single currency remained fragile, but the news flow from the UK was also not really supportive for sterling. The EUR/GBP cross rate hovered in a tight range roughly between 0.8100 and 0.8080, early in Europe.
There was some volatility after the publication of the UK inflation data. Inflation declined to 3.0% Y/Y from 3.5%. This was marginally below the market consensus, suggesting that inflation might become less of an issue for the BoE. EUR/GBP hit intra-day highs in the 0.81 area, but in fact EUR/USD more or less joined the decline in cable, leaving the EUR/GBP cross rate little changed.
The IMF published its outlook for Britain and advocated further monetary easing if things get worse. At the same time, the government should be less strict on austerity if growth comes under further pressure. In theory, this is no support for the currency, but we didn’t see any lasting market reaction to the IMF headlines.
Later in the session, EUR/GBP joined the broader sell-off decline of the euro overall. The pair closed the session at 0.8050, compared to 0.8094 on Monday evening.
Today, the UK eco calendar is enticing with the retail sales and the CBI industrial trends survey. One week after the Inflation report, the BoE will also publish the Minutes of its latest MPC meeting. After a weather-related boost in March (1.8% M/M) UK retail sales are forecasted to have dropped in April. The consensus is looking for a 0.8% M/M decline, but we believe that even a stronger decline is not excluded.
The CBI industrial trends survey is forecast to show a slight decline in total orders (from -8 to -11). Most important will be the BoE Minutes, although the Inflation Report provided us already with some insights.
The UK inflation report was soft on growth and didn’t exclude the option of more policy stimulation, which was somewhat surprising after last month’s Minutes, which showed that Posen dropped his case for more QE and the BoE sounded a bit more concerned about inflation.
Still, the Minutes of the May 9 and 10 meeting will be interesting as the Bank of England decided to pause and not increase the size of its asset purchases. We believe that David Miles most likely continued to vote for more QE and there is a risk that Spencer Dale joined his call for more asset purchases. After the Inflation Report, it will be interesting whether the BoE will sound somewhat softer on growth too. In theory, a soft BoE should be negative for sterling.
However, yesterday’s price action suggests that the overall sentiment on the euro remains the key factor also for EUR/GBP trading. The picture of the EUR/GBP cross rate is less negative compared to the EUR/USD headline pair. However, yesterday’s price action suggests that the upside in EUR/GBP will be difficult, too.
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