We have seen a lot of positive sentiment being stirred up as the economy of the United Kingdom has caused the British Pound to go on a nice bullish streak. The streak might not last that long and here is why.
In the first quarter of this year, the UK economy grew at 0.8 percent. We missed expectations of 0.9 percent but it was up from the 0.7 percent growth of the final quarter of 2013. The pound, commonly called the sterling, was little bothered by the data and closed against the Dollar at $1.6825. Since last July, the sterling has gone on a 10 percent bull run. The continued fast pace of the UK economic growth has fueled speculation that the MPC, or Monetary Policy Committee of the Bank of England, would beat the U.S. Federal Reserve to the punch and raise rates. However, that might not be the case and the sterling will find it hard to maintain its current price level.
The Sterling Should Begin to Lose Value
The general consensus is that we could see the value of the Sterling start to depreciate against the Dollar. It could fall from today’s levels near $1.68 to around $1.57-1.60 by the end of 2014. This deprecation will be highlighted thanks to a worrying sign regarding the UK economy. The recovery, especially GDP growth is still below its peak reached before the global economic crisis in 2009. We seem to have more spare capacity in the British economy than what is in the US where the GDP is more than six percent above its 2007 high. If an economy is below capacity, this means it is not firing on all cylinders and below full capacity.
Bigger Economic Constraints on the Horizon
The UK will face higher debt levels along with a fiscal squeeze and this will reflect on the inflation outlook. Inflation could fall by one percent by end of year, we saw it at 1.6 percent in March. The US inflation should rise to two percent by the first quarter of 2015. Due to this the MPC is more than likely to keep its monetary policy steady for a bit longer than the Fed. The Fed is likely to raise rates by October of 2015 while the MPC could now wait to the fourth quarter of 2015. This will lead to an inevitable correction in the GBP/USD currency pair.
The Sterling will also be dragged lower by the Euro, which should also depreciate as the ECB is forecasted to loosen monetary policy and by a stronger Dollar in general. Basically, the sterling has hit its peak and traders will begin to shift positions, as the Forex market is hugely long sterling right now. Couple this with a possible bottom on inflation levels, means a weaker pound in the near future. It is very interesting as growth has picked up, inflation has fallen. This leads us to think inflation should now pick up as it will only improve consumer purchasing power. So, if we have actually seen the bottom of inflation, then we could see a peak in short term growth. This will lead to a correction in the Sterling’s value.
Binary Options Take of the Day
Could be time to start considering repositioning your Forex portfolio. Again, volatility has been low and emerging market currencies like the Indonesian rupiah are performing nicely.
Discussion:
What is your take on whether or not the Bank of England will raise interest rates before the US Federal Reserve? Sound off in comments below.