The pound’s depreciating trend against the greenback stopped in April as the pace of the American economic recovery slowed. The Bank of England (BoE) made optimistic statements about the transitory effects of that negative data, but given the May general elections in the U.K., the central bank is unlikely to make a policy move until there is a clear political direction. The Old Lady will bring no surprises on Thursday, but there seems to be a growing divide on what the first move will be when the elections have run their course.
Chief Economist Andrew Haldane stated interest rates could be cut, in turn shocking some market watchers, but it’s highly unlikely the BoE will move off its official bank rate historic low of 0.5%. Haldane views the chances between an interest rate cut and a hike to be evenly balanced. BoE Governor Mark Carney and other senior members of the Monetary Policy Committee dismiss the option of a cut, as their expectations are for a brief period of lower inflation before the U.K. economic engine starts purring again.
British Policymakers Tread Cautiously
The latest indicators validate Carney’s views as the national accounts and the Markit/CIPS services purchasing managers’ index depicted a resilient British economy. The data indicates that a strong GBP has not hurt exports and future orders continue to come in despite the European Union’s lower demand. That being said the BoE issued a warning this week about the nation’s biggest current account deficit in more than 60 years. The data released on March 31 showed a large deficit in the first quarter of 2015 (£25.3 billion) with a small improvement over the fourth quarter figure of £27.7 billion. For 2014 as a whole, the deficit totaled £98 billion, equal to 5.5% of gross domestic product.
The BoE is worried that the size of the deficit makes the U.K. more likely to be affected by economic shocks. There is no immediate concern from a higher deficit, but the May election results could provide the kind of shock the BoE is warning about: higher taxes for foreign investors under a Labour-led government, or the concerns of a “Brexit” under a Conservative government which could sap the economy’s strength.
Sterling Rally Faded After Weak NFP
The GBP/USD rally that started with the release of the U.S. nonfarm payrolls for March is starting to lose speed as the USD continues to regain lost ground. The U.S. added 126,000 jobs in March, missing expectations of 245,000 by a wide margin. Alarmingly, the latest jobs data is the lowest seen stateside since December 2013. The pair traded at 1.4824 before the report was released, reaching a high of 1.4976 on Monday. The Easter holiday delayed the market’s full reaction to the soft data, and the GBP started giving up gains before merger and acquisition items boosted the appetite for the pound, pushing it up again to 1.4960. Meanwhile, U.S. Federal Reserve members have made clear a June rate hike is not off the table, which served to buoy the dollar against all pairs.
The week in forex is winding down as there are just a couple of notable economic indicators that will be published on Friday. The U.K.’s manufacturing production is expected to improve over the negative reading from last month. Next week will bring U.K. inflation data, a Group of 20 meeting, and rate announcements from the European Central Bank and the Bank of Canada.