The pound had a mixed performance in 2015, losing out to some forex rivals (namely the safe havens) while winning out against others (namely the comdolls). Nevertheless, an overlay of several pound pairs on GBP/USD shows that the pound’s forex price action had five distinctive periods or phases (or trend switches, if you like) throughout the forex trading year, and I have marked them below, as y’all can see. Let’s dive right in, shall we?
A. The Quick Drop
As I mentioned in 2014’s pound forex review, sentiment on the pound turned sour when the BOE decided to switch to a more dovish tone amidst a weak U.K. economic recovery. And the pound’s quick drop across the board at the start of 2015 was a continuation of that bearish sentiment, with the January 2 release of Markit’s December 2014 U.K. manufacturing PMI arguably being the main catalyst since it printed a lower-than-expected figure (52.5 vs. 53.7 expected, 53.3 previous) and hinted at further slowdowns in manufacturing and export-driven growth. And other economic reports that followed only served to convince forex traders to continue with their pound selling spree.
B. The Brief Rally
After the initial drop, the pound began getting buyers again as positive economic reports started to trickle in, beginning with another fall in the unemployment rate for the September to November 2014 period (5.8% vs. 5.9% expected, 6.0% previous), which helped to restore faith in the fragile U.K. recovery despite the January BOE meeting minutes showing that BOE officials unanimously voted to keep rates on hold, with Ian McCafferty and Martin Weale now finally joining the dovish side. The jobs report also printed another increase in the average earnings index (1.7% as expected vs. 1.4% previous), which marked the third consecutive month that earnings outpaced inflation and helped to assure forex traders that the U.K. economy will be supported by robust levels of consumer spending at least.
Also, the February 12 BOE Inflation Report warned that the U.K. could potentially see negative inflation figures and that the BOE was ready to cut rates if necessary, but they also upgraded their growth forecasts and stressed that the most likely move was a rate hike. And forex traders were probably more interested in the prospect of a rate hike since they continued buying up the pound.
C. Ouch Time
The brief rally later ran out of steam when U.K. economic reports began seeing red again, starting with the February 26 release of the quarterly business investment in the U.K., which posted a 1.4% contraction instead of a 2.0% increase (-1.4% previous) and threatened the U.K. economic recovery. The jobless rate also held steady at 5.7% instead of ticking lower to 5.6% while wage growth slowed down to 1.8% (2.2% expected) after increasing by 2.1% back in February.
Those were just a sample of the mostly negative economic reports that drove the pound lower against its forex rivals. However, most pound pairs started finding some support again after the March 18 release of the MPC meeting minutes, wherein MPC members reiterated that “all members agreed that it was more likely than not that Bank Rate would increase over the next three years.” In other words, a rate hike was still in the cards and BOE officials were now more hawkish again.
D. The Big Rise
After trading mostly sideways for a while, the pound began climbing up again as signs that the euro zone is not doing as poorly as it used to began to show up. For the forex newbies out there who are wondering why I mentioned the euro zone, it’s because a large bulk of the United Kingdom’s exports find their way to euro zone countries, namely Germany. And a sustained recovery in the euro zone naturally means more demand for British goods, which would revitalize the slowing manufacturing sector, and would make the U.K. less reliant on consumer spending to power its economy.
Speaking of the British economy, the U.K. was seeing some improvements as well, which reinforced the BOE’s forecasts of a strong rebound within the year and the idea that a rate hike was still in the cards. However, CPI finally dipped into negative territory for the first time since 1960, but forex traders probably priced that in already since the BOE did warn that inflation could temporarily dip into negative territory during their May Inflation Report.
Moving on, another factor pumping up demand for pound was the U.K. election shocker wherein Cameron’s Conservative Party formed a majority government despite forecasts to the contrary. The stability that a majority government promised made the pound more alluring, but it also probably helped that the surprising victory ramped up risk appetite, which is good for the higher-yielding pound.
E. Der Untergang (The Downfall)
German sure sounds awesome. Getting back on topic, the pound’s downfall didn’t become clear until late August when negative reports began to surface. But the prelude to the pound’s downfall, in my opinion, was the BOE’s decision to maintain the Bank Rate at 0.50% with a 8-1 majority vote instead of a 7-2 vote during the so-called “Super Thursday” of August 6 since that was the time that the BOE first hinted that it was in no rush to hike rates, which squeezed out some forex traders who were betting on a rate hike by Q1 or Q2 of 2016.
The BOE remained somewhat hawkish, however, and the pound briefly found support from forex trades during October when monetary policy divergence came into play. But that ended when BOE officials finally changed their tune during the November 5 “Super Thursday Part 2” wherein the BOE basically announced that it wasn’t so hawkish anymore, which prompted forex traders to speculate that a 2016 rate hike is now unlikely, squeezing out even more interest rate junkies in the process. And it probably didn’t help that positive developments in the labor market and consumer spending weren’t really having that much of a positive impact on the dismally poor CPI levels and slowing annualized GDP growth.
In retrospect, the pound’s forex price action was driven mainly by speculation on whether or not the BOE would be hiking rates, as well as the timing for the aforementioned potential rate hike. Economic reports that came out had an impact on the pound’s forex price action depending on whether they supported a rate hike or not. Also, the British economy is actually doing well relative to most of the other economies, but the pound uniformly lost ground to its forex rivals in the end, as BOE officials shifted their monetary policy bias from being blatantly hawkish to sheepishly somewhat dovish in the end. There were, of course, a few other major factors such as the U.K. elections, events in the euro zone, risk sentiment, etc., but I still hold that the pound’s forex price action was driven mostly by rate hike expectations.
What do you think? Will the U.K. see enough improvements in 2016 to spur rate hike expectations again? Will rate hike expectations continue to drive the pound’s forex price action? Or is a rate cut more likely given the rather poor CPI levels? Leave a comment below and vote in our poll on where you think GBP/USD will be by the end of 2016!