Pound Fundamental Factors
EFFECT ON CURRENCY
The Bank of
In February, BoE Governor Carney said in a
The BoE announced in August that it will only raise interest rates once employment has fallen back to 7%, and not necessarily even then. The BoE voted 8-1 for the plan, with one dissenting vote for a shorter inflation time limit. But in January, Carney said that the BoE is not looking at 7% unemployment as a trigger to raise interest rates, rather it is just a threshold.
In September, Carney said tightening would begin with a rate increase.
A rate increase or any other form of tighter policy should be viewed as Pound positive, because the higher interest raises the profitability of holding the currency.
The BoE maintains a 2% inflation target.
Lower inflation is Pound negative, as it relieves pressures on the Bank of
In the February inflation report, the BoE said it expects GDP growth for Q4 to be revised to 0.9% from the 0.7% initial estimate. It raised its 2014 GDP forecast to 3.4% from the 2.8% forecast in November.
Stronger expansion in
The unemployment rate rose to 7.2% in the fourth quarter, after falling to a four year low of 7.1% in the 3 month period ending in November.
The BoE said in its February inflation report that it expects unemployment to be reported at the 7% threshold in the 3 months ending with January.
Improved employment is Pound positive, because the faster the unemployment rate falls to the 7% threshold, the faster the BoE will likely unwind its accommodative policy.
Purchasing Managers' Index
A higher PMI may be Pound positive because it suggests improved economic growth.
On a yearly basis, GBP/USD has a correlation of about 0.15 to S&P futures.
Over the past month of trading, GBP/USD had a .60 correlation to S&P futures.
This means that the Pound has had little correlation to the S&P on a long term basis, but a positive correlation has surfaced recently.
Improved risk appetite may be Pound positive, but not necessarily.
On a long-term horizon, improvements to the Euro-zone economy may be Pound positive.
Referendum on EU Membership
PM Cameron announced that the
Former BoE member Posen called it madness to wait until 2017 because of a chilling effect on business investments.
The British government estimates that about 3 million
Signs of the