BoE and the UK Economy
Updated 15 July 2014
The main reason for the strong Pound Sterling over the last couple of months has been the prospect of higher UK Rates. The reason for this has been that the unemployment rate has declined faster than the BOE expected, inflation is overshooting and GDP is above trend.
Markets are currently pricing in a rate increase by November/December while this might be a bit too optimistic given that wage growth in UK remains weak, it’s most likely only a matter of time until the BoE starts to raise interest rates.
This means that the markets have been keen on matching and trading GBP against currencies like the Euro and SEK, which are expected to keep rates low for a long time.
What is the BoE watching?
Focus of the BoE is currently wage growth as the lower UK unemployment rate has been affect by a strong increase of self-employment. BOE expects the unemployment rate to reach 6.5% during 2014; the current rate is at 6.6%. PMI surveys show that the unemployment rate could drop to 6% at the end of 2014, something that would be very bullish for Pound Sterling
BoE is expecting inflation to increase with 1.8% y/y while the current rate is at 1.9% hence stronger than expected. The 10 year inflation average is 2.7%.
GDP is expected to have grown with 3.4%, current GDP growth is at 3% y/y and there is more scope for GDP to grow.
Housing market is booming with UK house prices increasing with almost 12% y/y, the BoE sees this as risk but is currently not acting on it.
The official BoE rate is currently at 0.5% with the monthly 15 year average at 3.25%.
The minutes of the latest meeting will be published at 9.30 a.m. BST on Wednesday 23 July.
Conclusions
Markets expect the official UK rate to be at 84bps in December which warrants a rate increase. While this might be a bit optimistic in the very short term its right now only a matter of time before the rate is higher. Unless the prospects of the UK economy declines substantially, it will make sense for traders and investors to buy major dips in Pounds sterling.
As an example the long term GBPUSD trend is bullish as long as we trade above 1.6700
Updated 15 July 2014
The main reason for the strong Pound Sterling over the last couple of months has been the prospect of higher UK Rates. The reason for this has been that the unemployment rate has declined faster than the BOE expected, inflation is overshooting and GDP is above trend.
Markets are currently pricing in a rate increase by November/December while this might be a bit too optimistic given that wage growth in UK remains weak, it’s most likely only a matter of time until the BoE starts to raise interest rates.
This means that the markets have been keen on matching and trading GBP against currencies like the Euro and SEK, which are expected to keep rates low for a long time.
What is the BoE watching?
Focus of the BoE is currently wage growth as the lower UK unemployment rate has been affect by a strong increase of self-employment. BOE expects the unemployment rate to reach 6.5% during 2014; the current rate is at 6.6%. PMI surveys show that the unemployment rate could drop to 6% at the end of 2014, something that would be very bullish for Pound Sterling
BoE is expecting inflation to increase with 1.8% y/y while the current rate is at 1.9% hence stronger than expected. The 10 year inflation average is 2.7%.
GDP is expected to have grown with 3.4%, current GDP growth is at 3% y/y and there is more scope for GDP to grow.
Housing market is booming with UK house prices increasing with almost 12% y/y, the BoE sees this as risk but is currently not acting on it.
The official BoE rate is currently at 0.5% with the monthly 15 year average at 3.25%.
The minutes of the latest meeting will be published at 9.30 a.m. BST on Wednesday 23 July.
Conclusions
Markets expect the official UK rate to be at 84bps in December which warrants a rate increase. While this might be a bit optimistic in the very short term its right now only a matter of time before the rate is higher. Unless the prospects of the UK economy declines substantially, it will make sense for traders and investors to buy major dips in Pounds sterling.
As an example the long term GBPUSD trend is bullish as long as we trade above 1.6700
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