One nation that has managed to stay relatively absent from the global currency war has been the United Kingdom. Aside from ₤375 billion in asset purchases orchestrated by former Bank of England Governor Mervyn King, the UK has largely refrained from monetary easing, keeping rates on hold for several years at 0.50%. Pound for pound, the UK has managed to navigate most of the mess that is dogging most Western Governments. By comparison, GDP growth is outpacing similar measures from 6 of 7 major currencies, the one exception being New Zealand. Today’s announcement of fourth quarter figures showed that the economy expanded a better than forecast 0.60% with annualized growth printing at a whopping 3.00%. Coupled with strong wage growth and lower than average inflation, the UK economy is on more solid footing than other regional peers. Annualized growth in the Eurozone is a depressing 0.90% and with today’s revision higher in the unemployment category, growth will remain elusive.
The rapid ascension in the dollar over the last few months has certainly helped the UK economy by keeping the pound competitive. It has also afforded current Bank of England Governor Mark Carney some breathing room with respect to monetary policy. Should conditions happen to worsen, Carney has the ability to cut interest rates further to accommodate the economy. On the other hand, should inflation rebound, Carney can also raise interest rates without doing irreparable damage to the UK economy. The only thing preventing him from raising rates at present is the prospect of deflation, with inflation standing at 0.00% presently. Although a bit of deflation could actually help the economy in the short-term by reducing prices and boosting spending, over the longer-term it could signal a shift in sentiment that could translate to weakness down the road. GBPUSD is firmly entrenched in a longer-term downtrend as evidenced by 8-straight months of weakening in the pair. Despite the brief rally after the FOMC Statement, the pair has resumed its trend lower and looks poised to retest lows not seen since 2010.
UK Growth Exceeds Expectations
Market Trends - 31/03/2015