STERLING has had a good run against the dollar, but it can't last much longer. The pound has risen to five-year highs on growing expectations of an early
For a start, the good news story around the British economy is already reflected in the exchange rate. You could see plenty of upside last summer while the dollar was trading at 1.50 to the pound. But up at 1.68 - a 14 per cent appreciation since last July - the air feels pretty thin.
This is not a comment on
Currency markets feed off this kind of short-term, high-frequency data - often to the exclusion of longer-term factors. And investors like sterling for its increasing yield, betting the Bank of
Perhaps the most critical in both the US and
Factor in other concerns over the recovery, such as high household debt and the lack of an export-led recovery (not to mention the awkward timing of a general election in May), and August looks the more likely moment for the Bank to make its move.
In the US, by contrast, structural changes in the labour market may drive the Fed in the other direction. Several economists have suggested America's participation rate - the proportion of people either in work or actively looking for a job - has shrunk permanently, and not just as a result of a cyclical downturn. That should support higher wages, other things being equal.
The US is also enjoying better macroeconomic data, while credit conditions there look better than in the
For now, the dollar is subdued. The Fed is pushing back on the market pricing early and more aggressive rate tightening. But ultimately the data will decide. The days of a more dovish outlook look numbered. The Fed may now be leading the race that no central bank wants to lead: to be the one raising interest rates first.
The case for a fall in the pound against the dollar is more than a play on relative yield, however. At some point, currency markets will start taking note of longer-term issues weighing on the British economy.
First, the markets have probably failed to price in the likely effect of government cuts over the next couple of years. Despite talk of "austerity
Cuts in 2016 will be three times this year's level.
But most pressing is the position of
At some point, the market will switch its focus towards these longerterm issues. The timing of that shift could be the big story of sterling this year.
Most Popular Stories
- National Retail Federation Reduces Sales Forecast
- Pandora Tumbles in Late Trading
- Sporty Ford Fiesta Fires on All 3 Cylinders
- Stop-Start Engines Save Gas, Reduce Emissions
- World Tensions Don't Curb Enthusiasm for Stocks
- Russia Fears Lasting Damage From Ukraine Crisis
- Visa, Amazon Results Drag Down the Street
- U.K. Economy Surpasses Pre-Crisis Peak
- Hispanic Leader Goes the Extra Mile
- Ohio State Band Chief Fired After Probe