Sterling consolidates ahead of UK Budget and MPC minutes
Twelve months ago all the talk, as we approached the 2013 budget, was of an economy in crisis and the prospect of a triple dip recession.
Certainly the prospect of a strong economic recovery was the last thing on most people's minds with the Chancellor still bruised from the fiasco over the pasty tax and other various policy U-turns.
Certainly the growth seen in the past twelve months can in part be attributed to some of the measures implemented a year ago, with the controversial "Help to Buy" scheme a key plank in the turnaround in UK economic fortunes over the past twelve months.
The wisdom of the policy has been quite rightly widely questioned over the course of the past year given the high levels of consumer debt already in the UK economy, but given the UK's reliance on its housing market the Chancellor probably felt the only way to kick start the economy was to push house prices higher again.
The policy has had a double impact in not only boosting consumer confidence and spending but also eroding the amount of under-performing loans on UK bank's balance sheets, as asset prices rise.
The extension of this policy to the year 2020 which was announced over the weekend will likely help drive house prices further, but could well run into problems with the Bank of England's financial stability committee if there is a belief that prices are running out of control, which in London they clearly are.
Unfortunately a policy such as this can only mask a problem unless supply constraints are dealt with, something that the government seems unable to do, despite this week's announcement of a garden city at Ebbsfleet.
Given these concerns of an unbalanced recovery there has been some encouraging signs of a more balanced recovery with strong gains in construction and manufacturing but these sectors still remain below their pre-crisis peaks, and these strong gains will need to continue if the current recovery doesn't start to plateau.
The performance of the pound has reflected the strong rebound in economic activity seen in the past few months with the sterling rate index rising from lows of 77.32 in March 2013 to a peak of 86 last month, its best levels since 2008. It still remains 20% below the 2007 pre-crisis peaks of January 2007 at 106.21.
The main worry now appears to be that a continued rise in sterling will erode export competitiveness but for a country running a massive trade deficit that is the least of the UK's concerns, given how much we import.
Bank of England officials as well as Governor Mark Carney have been at pains to play down the strength of the recovery, and keep a lid on sterling, saying that markets are getting ahead of themselves with respect to the interpretation of the data.
The fact is that the rise in the pound has actually helped the level of inflation come down in the last 12 months so much so that we are now below the Bank of England's inflation target for the first time in five years.
This week's budget is unlikely to change sentiment too much with respect to the overall trend in the pound given how much it tends to be a case of financial sleight of hand as money gets moved around like pieces on a chessboard. They very rarely tend to be game changing events and this week is likely to be no different, given how close we are to next year's general election, and the lack of room the Chancellor has in partaking in some cheap giveaways.
The markets are likely to be more interested in the latest minutes from the Bank of England meeting and the latest ILO unemployment data.
The unemployment rate is expected to remain steady at 7.2% while another sharp fall in monthly jobless claims is expected of 25k.
Of particular interest will be the average earnings data which looks like it could well be starting to edge back higher again and converging with the official inflation data after months of diverging away and squeezing consumer's real incomes. A rise of 1.3% is expected for the three months to January.
The latest Bank of England minutes are expected to highlight sharp divisions between policymakers about the amount of spare capacity in the UK economy, with Martin Weale in particular at odds with Mark Carney as to the amount of spare capacity in the economy.
This divergence of views was highlighted at the Treasury Select Committee over a week ago, and was a surprise given that previous minutes had suggested that there was a broader consensus about policy amongst MPC members.
If this week's published minutes are to be treated as in any way credible they should reflect last week's testimony differences, and if they don't it begs the question as to what use these minutes really are.
While the future direction of the pound, particularly against the US dollar, is likely to be dictated by expectations of future UK interest rate rises, the direction of travel vis-à-vis the Federal Reserve's current policy is also a factor.
The current uptrend has been in place since the July lows of 1.4815, with last month's peaks at 1.6820 the main barrier to a move towards 1.7045 and the 2009 highs. A fall below 1.6550 would undermine the recent uptrend and suggest a move back towards the February lows at 1.6210.
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