UK Second GDP Estimate to Validate Pound Rally

U.S. Fed Chair exits the market spotlight this week giving few clues about timing of first interest rate hike. The United Kingdom comes into focus, as the ONS will release the second estimate of economic growth in the fourth quarter.

U.S. Federal Reserve Chair Janet Yellen’s second day of testimony has wrapped up with little new information disclosed. Chair Yellen played her greatest hits (data dependency, patience, international developments) as she explained to U.S. senators and members of congress the Fed’s view on the U.S. economy. The central banker took some hits from political offensives that seek to undermine the independent status of the Fed. The Swiss National Bank sparked a surge in anti-central bank rhetoric with their shock decision in January 15.

The second estimate Office for National Statistics (ONS) will be released on February 26. The preliminary estimate was released on January 27. GDP is estimated to have increased by 0.5% in Q4 2014 compared with growth of 0.7% in Q3 2014.The market expectations if for the second estimate to hold the previous figures of 2.7 percent growth in the fourth quarter of 2014 compared to the same quarter the year before.

The U.S. and Germany will also publish their revised estimates for GDP on Friday. The three economies are the current engines of growth in the G7 as the rest struggle to gain traction. Central banks around the world have launched stimulus programs that have driven the cost of debt to historic lows.

The U.S. and the U.K. will be the first of the pack to move away from those easing policies. The Bank of Japan and the European Central Bank have been late entrants but what they missed on timing they plan to make up with the size and speed of deployment. The resulting rate divergence between benchmark interest rates will drive higher rate currencies higher. The BoJ and the ECB hope the weaker currencies will help drive exports and boost internal consumption.

The GBP/USD continues to rally as it touched a twelve-month high. As the two frontrunners of higher interest rates the U.K. might be delayed, as it must await the outcome of a close general election in May. The lack of commitment from the Fed on a rate hike schedule continues to drive the pound higher as economic data supports the currency. BOE Governor Mark Carney said on Tuesday that low inflation is temporary and will bounce to within the 2% target in two years. This statement has eased the concern of the market about record low inflation that could complicate a potential interest rate rise. Low oil and food prices have driven down inflation but are not expected to keep at current levels for long.

The BoE continues to be worried about a housing bubble growing out of control and will need to raise rates to stabilize the economy as per new Monetary Policy Member Kristin Forbes. The ONS revised estimate on the growth of the U.K. economy is expected to have no surprised and validate the positive albeit slower growth in the last quarter of 2014.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza