Pound Hits Another Record - Is Its Strength for Real?

[B][U]Talking Points[/U][/B]

  • Australian Dollar: Trade Balance improves materially
  • Euro: PMI in line Retail Sales a but soft
  • Pound: Strong services PMI but cable unaffected
  • Dollar: Independence day capital markets closed
    [B][U]Pound Hits Another Record - Is Its Strength for Real?[/U][/B]
    Ahead of what promises to be a very quiet day in North America with US capital markets closed for Independence day holiday, the majors continued their upward drift against the dollar, with UK and EZ data confirming the bullish bias. In London pound hit another 26 year high trading through the 2.0200 level before backing off on profit taking. HBOS house price index printed a tad lower than expected at 0.4% rise vs. 0.7% projected, however the year over figures continued to record double digit gains registering a 10.7% reading. Furthermore the PMI Services report posted a better than forecast reading (57.7 vs. 57) suggesting that high interest rates and the high value of the currency are not having any negative impact on growth in the services sector.
    All of this data flow should serve as a strong support for pound bulls looking for a 25bp hike from the BOE tomorrow. Some analysts have suggested that given the lower levels of headline inflation the UK central bank may hold off on hike, with MPC producing another close 5-4 vote. However, given the underlying buoyancy of UK economic growth, the persistent double digit annual increases in housing values and most importantly the blistering growth in money supply figures the generally hawkish central bank is likely to prove the consensus right and raise rates to 5.75%.
    The pound may well sell off on the news in classic “buy the rumor, sell the news” dynamic, but it should be a temporary dip. Having now convincingly taken the 2.000 barrier, the unit is trading on relative growth and interest rate differentials versus the greenback and that strength is likely to continue unless UK economic performance suddenly cools or US economy perks up. Neither of these scenarios seems probable given the current state of affairs and therefore the pound rally may continue further than most market participants expect. The one risk to the pound bullish case is a delay in rate hikes by the BoE. Should Mr. King and company choose to stand down tomorrow, all bets will be off and the currency could head below the 2.000 barrier once again.