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Carney will keep markets guessing about BoE course of action

ON TUESDAY, the Office for National Statistics released the Q4 2013 GDP readings for Britain, recording the fastest annual increase in six years in 2013.

On a year-on-year basis the figure grew to an impressive rate of 2.8% from 1.9% in 2012. However, the quarterly reading only posted 0.7%, in line with general market expectations but down marginally from the prior quarter’s reading of 0.8%. The reason for the reduction this quarter appears to be because of lower construction output in the UK, which dropped at the back end of 2013.

Given this sharp increase in yearly growth for Britain, it is likely to prompt speculation among market participants about when the Bank of England could look to raise their benchmark interest rate. It is worth noting however that last week BoE governor Carney stated that ‘there is no need for rates to rise anytime soon’, despite the fact that the unemployment rate fell sharply to 7.1%. This is very close to the original rate hike threshold that Carney put in place (7.0%) back in August of last year. With this in mind the governor – for the time being at least – will certainly keep the markets guessing about the next course of action from the Bank of England.

No notable reaction was observed in the FX market on the release of the data but long term trends seem to be running out of steam. GBP/USD can expect to continue to hold around the 1.65-1.66 region for the time being, given the overall improvement in UK economy in comparison to 2012, at least until there is further clarity from the Federal Reserve on the pace of their QE tapering.

Current levels for the GBP/USD cross continue to remain favourable for current UK importers, however it is not out of the realms of possibility to see GBP/USD back around the 1.50 mark by the end of the year, if the Fed’s tapering picks up dramatically.

Ken Chigbo, Global Reach Partners

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