#GBP Analysis - 20th of May

GBP/USD fell over 400 pips during the first half of May, before rallying 300 pips between the 16-18th as swings in Brexit polls continued to drive sentiment in sterling.

Upside was capped on the 17th with a miss on CPI readings for April; Core CPI was flat for the month and down to 1.2% y/y, from a prior of 1.5% and below expectations of 1.4%. Headline CPI rose a mere 0.3% in the 12 months ending April 30. Despite this miss, downside in GBP was limited as the much of decline in prices was associated with a mean reversion after and increase in demand for flights and general consumption during Easter which inflated the prior month's readings.

GBP Analysis

Interest Rate

Official Bank Rate: 0.50%

Last Change: March 5, 2009 (1.00%)

Expected Future Change: Increase (2017)

Next Release: June 16

Inflation

Inflation Target: 2%

Period: Year ending April 30

CPI: 0.30%  Prior: 0.50%

Core CPI: 1.20% Prior: 1.50%

Next Release: June 14

Employment

Period: April (CCC), March (UR, AWE)

Claimant Count Change: -2,400  Expected: 4,300

Unemployment Rate: 5.1%  Expected: 5.1%

Average Weekly Earnings 3m/yy: 2.0%  Expected: 1.7%

Next Release: June 15

Growth

Period: Q1

Preliminary GDP: 0.4%  Expected: 0.4%

Next Release (2nd Estimate):  May 26

On May 18, a poll released by Ipsos MORI suggested an 18 point lead to the 'In' campaign, with the UK public significantly favouring to remain in the EU, with 55% of those polled voting 'remain' compared to only 37% voting 'leave'. Following the announcement GBP strengthened significantly with cable rallying over 200 pips to break above 1.46. Although economic data will continue to influence GBP, news and developments regarding the UK's EU referendum is likely to remain the primary driver of price action and sentiment leading into the referendum on June 23.

On May 12, the market was anticipating a potentially cautious communication from the BoE, given the wide range of views on how much of an impact the upcoming referendum is having on the UK economy. The BoE's 9 MPC members all voted to keep rates on hold at 0.5%. The Monetary Policy Statement reaffirmed that core inflation remains subdued and noted that uncertainty regarding the EU referendum has begun to weigh on economic activity, with the referendum being the greatest risk to their forecast. However, the BoE, and Carney during his press conference, failed to make any overtly dovish remarks, stating that their base case is for the UK to remain in the EU and that economic activity should be boosted as the uncertainty produced from the referendum dissipates following a 'stay' outcome. GBP rallied after the press conference due to this. The rally was however short-lived.

The Inflation Report, also released May 12, saw forecasts relatively unchanged from February, but marginally lowered growth for 2016 and 2017. The MPC expects to hit its inflation target in mid-2018.

Released May 18, Claimant Count Change for April saw 2,400 people leave benefits, compared to expectations for an actual increase of 4,300 people, this was however accompanied with last months 6,700 claimants being increased to 14,700, slightly taking the shine off of this months positive figure. The Unemployment rate for March remained unchanged at 5.1% as expected, along with Average Weekly Earnings increasing by 2.0%, above expectations of 1.7%, and last months 1.8% being revised upwards to 1.9%. As an underlying measure of inflation, Average Weekly Earnings will remain an influential figure in regards to expectations and timing of rate hikes by the BoE.

The first reading of Q1 GDP, released April 27, matched expectations with the UK growing 0.4% for the quarter, and 2.1% over the prior 12 months. This was slightly lower than Q4 GDP of 0.6%. The second reading of GDP is due at the end of May and will contain a much deeper look into the sector breakdown for the economy.

As long as the BoE maintain their conviction to raise rates circa 2017, the pound will be fundamentally a long-term bullish currency however this will remain largely irrelevant until the June 23 referendum has passed, as polls drive short-term direction.