The UK Series: What Does The Future Hold?

The United Kingdom’s economic prospects are substantially superior to the previous quarter. After a summer of surpassing expectations, they have rightly found themselves pronounced the fastest growing economy of the advanced nations.

In just over one month, the Cable has appreciated by an astronomical 600 pips.

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While some may feel that they have perhaps been a bit late in catching the train, there is substantial evidence pointing towards the notion that this trend is going to continue throughout the rest of 2013.

This begs the question, what exactly does the future hold for the UK economy?

BoE’s Enthusiasm:
Within the Friday 30th September’s BoE minutes, Mark Carney proficiently admitted his pleasure regarding the UK economic progress, conceding that there was no need for further QE. This bullish statement will build the pure fundamental basis for other aspects of the UK economy, such as:

Consumer Confidence
In some regards, the BoE is the ‘voice’ of the UK economy. Each positive indication they make transpires onto the UK public. The Christmas period is looming and this alone will encourage spending. The latest consumer confidence reading was comparable to the pre-recession levels of 2007, validated by car sales increasing 4.5% alone in the last three months.

Perhaps increasing consumer confidence will further reinvigorate an already impressive housing market. If the BoE’s optimism regarding the UK economy continues, an increase in interest rates may be closer than we anticipated. This threat alone would encourage residents to purchase properties, while the interest rates remain at 0.5%. The UK government’s ‘help to buy scheme’ has already been initially successful, and is now set to go into its second phase, which will open up accessibility for more UK residents to make applications. This will drive up the price of housing, and lead to the Cable gaining in value.

Unemployment
All the necessary signs are present for unemployment to decrease. The services sector, which equates to over 2/3rds of the UK economy, is growing at its fastest rate since before the beginning of the recession.

Employment opportunities are being created. With the Christmas period now so close, two retailers alone are creating over 12,000 jobs. The UK jobless claims have already decreased for 10 consecutive months. The fact that the UK is now heading into its busiest spending period suggests that the trend of jobless claims decreasing will continue over the next quarter. This will prove bullish for the Cable.

The QE Monopoly Game
The most influential variable, which will have drastic ramifications for the value of the Cable, is when exactly the US Federal Reserve will begin tapering their QE exit stimulus. In order for this to happen, the US needs to “produce stronger economic data.”

So far, this has not been the case.

Consumer confidence is absolutely essential to the US economy, but has declined for the previous two months. The latest University of Michigan Confidence scored a 5-month low figure. This gives a broad indicator on consumer confidence regarding personal finances, business conditions and purchasing power. The disappointing results on Friday led to another 135pip gain for the Cable.

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An even more detrimental consequence coming from Friday’s results is that the University of Michigan’s consumer confidence report also reviews small business confidence. This could indicate that the next NFP release could, for the fourth month running, disappoint.

If the US is not adding enough jobs to their economy, it is highly unlikely they will begin tapering their QE stimulus. Consumer Confidence and NFP is, after all, the type of “stronger data” the Federal Reserve requires for such an action.

Finally, Federal Reserve Chairman, Ben Bernanke is set to step aside from his position in the New Year. Three weeks ago, his most likely successor ruled himself out from his position and right now, there is no apparent successor. Without anybody being present to fulfill his position, it is very unlikely the Federal Reserve will begin tapering QE.

To conclude, there are various signals that ‘longing GBP/USD’ is still a very attractive option. The UK is going into its busiest spending period and there are genuine indications that employment opportunities are being produced.

Meanwhile, the US economy is performing indifferently. If this inconsistency continues, and the Federal Reserve continues to delay tapering their QE stimulus, there is no reason to feel that it is unachievable for the Cable to inflate another 600 pips over the next quarter.

One thing is for certain though, the next set of NFP results can go a long way into indicating whether the US will begin tapering their QE stimulus, and more importantly, when.

Written by Jameel Ahmad, Research Analyst at Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX