Quarterly FX Forecast October - December 2016 GBP - USD

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1 Quarterly FX Forecast October - December 2016 GBP - USD Sterling US Dollar Looking ahead to the rest of 2016 UK & USA economic update Forecast for Sterling US Dollar 1

2 Introduction Central banks continued to hog the limelight in the third quarter of They did not always accomplish much, but investors hung on their every word, wink and nod in the hope of divining what they might have in mind for monetary policy. It was important to know: If the central banks intended to continue printing money on an industrial scale and buying up every financial asset in sight their action would support the prices of shares, bonds and emerging-market and commodity-related currencies. If on the other hand, Quantitative Easing (QE) were to be nearing the end of its long and winding road those assets would begin to look overpriced when the free-money tap was turned off. In the event, most central banks either stuck to their existing policy stance or relaxed it - as did the Bank of England - with lower rates or increased QE. As a result, the commodity currencies were in fine fettle at the end of the quarter while the allegedly safe US dollar and euro were looking quite ordinary. Rates July - September Average High Low Range July ±2.7% August ±1.9% September ±2.0% Quarter ±2.7% 12 months ±10.6% Historical Rates 2

3 United Kingdom the Phoney War In the immediate aftermath of Britain s referendum on EU membership the pound took a dive, losing an average of -9% of its value by the end of June. Although it has declined further in the third quarter - and indeed its performance was the weakest among the major currencies - its losses over the three months are just half those it sustained in that single week. economic data continue to indicate expansion: employment is holding up, house prices are rising, and retail sales have not suffered the predicted blow to consumer confidence. The Bank of England claims some of the credit for that stability, having stepped in pre-emptively to cut the Bank Rate to 0.25% and restart the dormant asset purchase programme in early August. Not much has happened to the pound because not much has happened to the UK economy and, as far as anyone can see, not much has happened in the mechanics of leaving the EU. The United States Hobson s choices Two difficult decisions face America; one is the responsibility of ten people in a metaphorically smoke-filled room, 226m US voters will decide the other. Neither is easy for those who must make the choice. At the September meeting of the Federal Open Market Committee, seven members voted to keep the target for the Federal Funds rate in a range of 0.25%-0.5% range while three wanted to increase that target to 0.5%-0.75%. They will ask themselves again in December if the US economy can handle an increase. A month before that voters will be asked to elect either Hillary Clinton or Donald Trump as the 45th president of the United States. According to the most recent opinion poll, an eighth of the electorate say none of the above. So monetary and political uncertainty stalk the dollar into the fourth quarter, not exactly weighing it down but not doing it any favours either. 3

4 Issues which could affect the UK economy Looking ahead to Q Uncertainty The prime minister ambiguously announced when she took up her post that Brexit means Brexit. From then until the beginning of October there was no further official word on the subject. Then, at the Conservative party conference in Birmingham, all was made clear: Brexit means Brexit and the Article 50 trigger will be pulled no later than the end of March. Ms May is not fond of the hard Brexit or soft Brexit monikers, but membership of the single market and the free movement of people are apparently off the agenda. There will now be six months of speculation on the subject, few of which are guaranteed to be helpful to sterling. Policy There was no great surprise when in August the Bank of England cut the Bank Rate to 0.25% and said it would buy another 70bn of government and corporate bonds. Some thought the move was premature, but the governor defended the decision to parliament s Treasury Committee saying, in effect, Ah, but what if we hadn t? Since then Mark Carney has made clear that further easing is on the cards if the economy struggles. The worry here is that another cut before Christmas would limit the bank s scope to act if the actual Brexit when it happens, creates real economic waves. Politics The prime minister s MPs have so far been well-behaved about Brexit. That might change when they find out what it really means. Mrs May has a majority of just 8 in the House of Commons, and a rebellion would muddy the waters and undermine confidence. With the biggest opposition party in disarray that would probably not result in a change of government, but it would make life tougher for the pound. 4

5 Issues which could affect the United States economy Looking ahead to Q Federal Reserve Jobs and confidence Since the Federal Reserve made its first interest rate adjustment for seven years last December, financial markets have been on tenterhooks in anticipation of a follow-up move. Six times this year they have been disappointed, and a November increase would be inappropriate because of the election. Futures pricing gives a roughly evens probability to a rate hike in December: if it happens, the dollar should end the year on a high note. After a glitch in May, US jobs growth has returned to form. It was not quite the form of 2015 when employment grew by an average of 213k a month, but in the year to date, nonfarm payrolls have increased by 182k a month. There has not been a loss of jobs since September 2010, and unemployment is below 5%. The employment data pose no obstacle to a rate increase by the Fed, and the Conference Board s index of consumer confidence hit a post-recession high in September. Presidents The Economist newspaper s lateseptember brief on the presidential hopefuls plans for the economy is headed Hilary Clinton s fiscal plan is fiddly. Donald Trump s is absurd. It is not an optimistic opening, and it doesn t get any better as it moves along, noting that Mr Trump is imprecise about numbers. That said, it is hard to know whether the relative safety of Ms Clinton or the relative uncertainty about Mr Trump would be better for the dollar. 5

6 GBP - USD forecast ACTUAL FORECAST 1.45 Rate HSBC Barclays JP Morgan Citigroup Credit Suisse Morgan Stanley 1.10 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q HSBC Q Q Q Q3 3months 6months 9months 12months Barclays JP Morgan 1.32 Citigroup Credit Suisse Morgan Stanley High Low Median forecast as at

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