2015 was all about the US dollar strengthening ahead of an anticipated interest rate hike which eventually came in December. All the major currencies weakened against the US dollar as a result and I had very few discussions about Sterling in particular, by which I mean from a Sterling perspective. This was because it didn’t really lose that much ground. Firstly, the main economic indicators were either similar to the US or moving in the same direction and secondly, there was a consensus view that the Bank of England would not be far behind the Federal Reserve in hiking rates as well.
That changed in late December. BofE Governor, Mark Carney, has now said that interest rates could stay at 0.5% for all of 2016. This caution is understandable since inflation remains stubbornly low, China is slowing down and the US reaction to their hike is still being assessed. Domestically, UK wage growth has disappointed.
Of course, most of the global concerns, such as falling oil, which is deflationary, affects everyone. So whilst the Bank of England maintains its dovish stance, it’s hard to see how it can out-dove the Bank of Japan and the European Central Bank. Even the Federal Reserve appears to have quietly dropped its talk of 4 rate hikes in 2016. The bond markets are pricing for 2 at most or even none at all.
Mark Carney speaks on the Monetary Policy Committee meeting tomorrow and we can expect a list of global concerns justifying keeping rates on hold. It will be interesting to see how much of Sterling recent weakness he thinks is attributable to the build up to a possible Brexit – one of the few issues that is unique to Sterling. I say recent weakness because, in my opinion, Sterling has already had its move against the USD with all the major concerns priced in. If that is the correct assumption then I would not expect excessive weakness from here. If anything, I would be more inclined to expect Sterling to recover on the back of better economic indicators (manufacturing, mortgages, etc.) notwithstanding poor wage growth, for which there could be a unconnected explanation, and which, in any case, is already priced in. As such, I wouldn’t be surprised to see Sterling stabilise here at $1.44 and possibly recover to around $1.50 by the late summer.