JUNE 29, 2015

Writing an update on sterling while the world is focused on Greece is like being a newspaper’s squash correspondent during the Olympics; you’re involved but you’re not going to make too many headlines. In a climate of fear and intrigue as we are seeing in Greece at the moment, all but the most important and fundamental of data points are lost in the noise and fog.

A mixed bag for sterling

The pound’s performance was mixed last week, starting off strong before fading as the week went on. Speeches by Monetary Policy Committee members Weale, Forbes and McCafferty were towards the more hawkish end of the scale. Certainly Martin Weale’s FT article suggests that he is the market favourite to vote for an interest rate rise at the Bank of England’s August meeting.

The arguments are well-known; inflation expectations are coming back from their slightly deflationary lows while the UK economy is driving onwards and the employment market is creating wage increases. These form the basis of our predictions for an interest rate rise by March of next year – a thought that the market is now backing to an 80% probability.

This probability is based on an assumption – misguided or not – that the Greek situation is resolved in a peaceful manner and that Greece does not leave the Eurozone. If that proves to be wrong then I would tack another 12 months on to that March projection.

Yellen will wait for now

Last month, the IMF warned about the fragility of world markets in a climate of possible interest rate increases from the Federal Reserve. It is my belief that the Bank of England will wait on the Federal Reserve to start the ball rolling and Janet Yellen will be cautious about increasing the interest rate divergence between the US and the Eurozone/China with emerging markets in the firing line as a result.

Looking ahead

Looking at the data calendar for the week ahead, there is very little to distract markets from Athens but some sterling negativity could easily be spied. Tomorrow’s final reading of Q1 GDP is expected at 2.5%, slightly higher than the 2.4% that the first revision gave us. Consumption, investment and inventories are expected to be the main positives with Q1’s awful trade performance the main laggard. As a result the latest reading of the UK current account – exports from the UK minus imports into the UK – should continue to deteriorate further into negativity.

PMIs from the manufacturing (Wednesday), construction (Thursday) and services industries (Friday) are all set to stabilise. Manufacturing in the wider European Union bounced back in May and that should continue, although I am expecting the export picture to remain poor. Real wage increases and the pricing out of the risk surrounding the general election should allow the service sector a decent reading in June.

Given the noises from Athens, making a prediction on sterling this week is even more of an inexact science. For what it’s worth I can easily see GBPUSD coming lower as speculators look for the haven safety of the greenback, while GBP should outperform higher yielding currencies and the beleaguered euro.