Forex traders were none too happy and began dumping the pound when the Bank of England (BOE) decided to maintain the bank rate at 0.50% with a vote ratio of 8-1 in terms of those who want to hold rates versus those who want to hike rates. The pound has remained relatively subdued after that, but what do the underlying fundamentals say? Should forex traders keep dumping or avoiding the pound? Let’s find out!
The preliminary estimate for Q2 2015 GDP came in at +0.7%, which marks the 10th consecutive quarter of economic expansion and is a very welcome improvement over Q1 2015’s +0.4%.
The year-on-year estimate, meanwhile, was also good since it saw a wicked 2.6% growth. A closer look at the components show that the 0.7% increase in services, which contributes around 78.4% to GDP in terms of output, was the main driver. And while all sub-components saw some growth, the 0.8% growth in the “business services and finance” sub-component was the greatest contributor. Production, which contributes around 14.6% to GDP in terms of output, increased by a solid 1.0%, thanks to the surprisingly jump (+7.8%) in the “mining and quarrying” sub-component.
Commentary from the Office for National Statistics (ONS) attributed the jump to recent tax changes in the March budget, which you can read here if you need to sleep. On a slightly more downbeat note, the manufacturing sub-component fell by 0.3% after gaining 0.1% last quarter.
While the unemployment rate remained unchanged at 5.6% for the April-June reporting period, forex traders bullish on the pound had a reason to celebrate since that was better than last year’s 6.3%.
In addition, claimant count change declined by 4.9K, which means that less people are claiming unemployment benefits. The previous reading was also revised to show a 0.2K increase instead of a 7.0K increase, which made things even better.
The average earnings index was a bit of killjoy, though, since it only advanced by 2.4% (2.8% expected, 3.2% previous) due to a 3.3% decline in bonuses. It’s still an increase, though, and that’s a good thing. Moreover, if bonuses are excluded, then the actual reading is an increase of 2.8%, which is the same as last time.
Consumer Sentiment & Spending
The Gesellschaft für Konsumforschung, better known as “GFK” for a good reason, released its consumer confidence index for July, and it wasn’t very pretty since the index is currently at 4 points, a 3-point decline over the previous month.
It’s still in optimistic territory, though, so it ain’t too bad. The GFK report cited “anxiety over the potential Grexit melt-down and global uncertainty” as the main reason for the decline. Of course, we now know that the Greek situation has stabilized a bit.
This convinced forex traders to avoid or dump the pound, probably because of fears that consumer demand is not sufficient to cause a pickup in inflation, which could hurt the prospects of a future rate hike. In addition, fears of a future slowdown in GDP growth began to crop up given that consumer spending, known in the U.K. as household consumer expenditure, has been the bedrock of the U.K. economy, and in the case of Q1 2015’s GDP, it’s main driver.
Still, the overall trend is intact since year-on-year estimates have been growing for the 28th consecutive month, with July 2015 growing by 4.2% when compared with July 2014. And as extra icing on the delicious cake, the amount spent in the retail industry rose by 0.2% month-on-month, and a respectable 1.0% year-on-year.
Business Conditions & Sentiment
Markit’s manufacturing PMI for July had good news for forex traders since it ticked higher to 51.9 after dropping to 51.4 back in June. The increase was attributed to the “strong performance of the consumer goods sector”, which managed to offset the fourth consecutive decline in new export orders brought about by the relatively strong pound.
Markit’s senior economist, Rob Dobson, also mentioned that “growth remains near-stagnant and suggests that the [manufacturing] sector is continuing to act as a drag on the economy” but it may not be too problematic since the sector only accounts for “one-tenth of the economy.”
Markit’s services PMI for July had relatively good news for forex traders too because even though it ticked lower to 57.4 (58.5 previous), the long-term trend shows that the industry has been expanding for the thirty-first consecutive month already, which shows just how robust the industry is.
The headline reading for July’s consumer price index (CPI) grew by 0.1% year-on-year (0.0% previous) but declined by 0.2% month-on-month (0.0% previous).
Apparently, the greatest contributor the year-on-year increase was the “clothing and footwear” component, which seasonally falls between June and July, but “the price fall between June and July last year was larger than usual” when compared with this year.
Summary & Potential Effects on the Forex Market
Overall, the British economy is actually doing rather well when compared with most of the other major economies. And now that forex traders who have been betting on more hints of a rate hike have been squeezed out by the 8-1 vote and not-too-hawkish rhetoric from the BOE, perhaps long-term and medium-term forex traders who rely more on the fundamentals can get back in the game… until the next batch of data starts coming in.