20 Feb 2015
GBP/USD: Potential to get back above 1.60 - SocGen
FXStreet (Bali) - Kit Juckes, Head of FX Strategy at Societe Generale, notes that if the market shifts its pricing in the next few months (either re-pricing Fed rate expectations down, or bringing forward the expected timing of a UK rate hike) GBP/USD can easily get back above 1.60.
Key Quotes
"UK average weekly wage growth picked up to 2.1% y/y in December, although for regular pay (excluding bonuses) it slowed a touch to 1.7%. But even for the ex-bonus figure, that’s a 1% pick-up between June and December, at a time when consumer price inflation fell from 1.9% to 0.5%. That takes real ex-bonus wage growth from -1.2% per annum, to 1% in just 6 months. Extrapolating short-term trends and getting over-excited about them carries obvious dangers, but if wage growth is running at 2 ½% by mid-year and CPI inflation is stuck at zero (or lower) real wages will be growing at a fair pace. It may be temporary, all to melt away once the effect of falling oil/petrol prices fades at the end of the year, but what could that do for GDP? Or indeed, for the pound. Imagine if the UK grows 1% or more in Q2. What would the MPC do then? "
"At the moment the UK rates market prices 1year swap rates (currently 75bp) at 1.24% in a year’s time. But the market prices 1-year US rates (currently 51bp) at 1.28%. So over the next year the market is priced for US 1-year rates to rise by75bp, and for UK ones to rise by 50bp. The fall in UK 1y/1y rates relative to US ones happened at the same time as the GBP/USD rate fell back 1.74 to 1.50. I find it easy to imagine that in a year’s time UK 1-year rates are at the same level as US ones, if not a bit higher. And if the market shifts its pricing in the next few months (either re-pricing Fed rate expectations down, or bringing forward the expected timing of a UK rate hike) GBP/USD can easily get back above 1.60. All the more so if EUR/USD gets stuck in a range and the large (unsustainable?) long dollar position in the speculative FX market is reduced."
"This doesn’t alter my long-term view of the dangers to the UK from the most uncertain General Election I can remember, or from a huge current account deficit and a budget deficit that is dangerously big at this point in the economic cycle. It’s just that I’ve been droning on about GBP/USD downside risks for months and months and I rather wish I had pointed out to clients that there was a strong case for exiting those positions, before real wage growth jumped. I’ll get back to bearish GBP/USD positions another day, perhaps closer to the election, perhaps when GBP/USD is back at 1.60.... In the meantime, who knows, maybe by he time I go skiing in March I’ll be able to buy Swiss francs at a GBP/CHF rate of1.50 after all..."
Key Quotes
"UK average weekly wage growth picked up to 2.1% y/y in December, although for regular pay (excluding bonuses) it slowed a touch to 1.7%. But even for the ex-bonus figure, that’s a 1% pick-up between June and December, at a time when consumer price inflation fell from 1.9% to 0.5%. That takes real ex-bonus wage growth from -1.2% per annum, to 1% in just 6 months. Extrapolating short-term trends and getting over-excited about them carries obvious dangers, but if wage growth is running at 2 ½% by mid-year and CPI inflation is stuck at zero (or lower) real wages will be growing at a fair pace. It may be temporary, all to melt away once the effect of falling oil/petrol prices fades at the end of the year, but what could that do for GDP? Or indeed, for the pound. Imagine if the UK grows 1% or more in Q2. What would the MPC do then? "
"At the moment the UK rates market prices 1year swap rates (currently 75bp) at 1.24% in a year’s time. But the market prices 1-year US rates (currently 51bp) at 1.28%. So over the next year the market is priced for US 1-year rates to rise by75bp, and for UK ones to rise by 50bp. The fall in UK 1y/1y rates relative to US ones happened at the same time as the GBP/USD rate fell back 1.74 to 1.50. I find it easy to imagine that in a year’s time UK 1-year rates are at the same level as US ones, if not a bit higher. And if the market shifts its pricing in the next few months (either re-pricing Fed rate expectations down, or bringing forward the expected timing of a UK rate hike) GBP/USD can easily get back above 1.60. All the more so if EUR/USD gets stuck in a range and the large (unsustainable?) long dollar position in the speculative FX market is reduced."
"This doesn’t alter my long-term view of the dangers to the UK from the most uncertain General Election I can remember, or from a huge current account deficit and a budget deficit that is dangerously big at this point in the economic cycle. It’s just that I’ve been droning on about GBP/USD downside risks for months and months and I rather wish I had pointed out to clients that there was a strong case for exiting those positions, before real wage growth jumped. I’ll get back to bearish GBP/USD positions another day, perhaps closer to the election, perhaps when GBP/USD is back at 1.60.... In the meantime, who knows, maybe by he time I go skiing in March I’ll be able to buy Swiss francs at a GBP/CHF rate of1.50 after all..."