While the Dollar has eased against some of the majors this week, down 0.13% against the EUR and 0.33% against the Yen, any hopes of the pound getting through the week relatively unscathed, the political doors firmly shut for Christmas, were dashed from the start of the week.
Cable has fallen for four consecutive days this week to leave the pound down 1.85% against the Dollar for the current week, with the rest of the day to go before the pounding can take a Christmas break.
With Cable sitting at $1.2265, down 0.15% for the day, it certainly looks ominous for the pound, inflation and household spending going into the New Year, the markets likely to wake up to a post-holiday hangover like no other with just a week remaining before Britain enters that 3-month period of chaos,which is expected to end with the government invoking Article 50.
The BoE just a week ago removed any hopes of a rate hike over the near-term, pointing to a likely weakening in the UK economy going into the New Year, while also stating that inflation was no longer likely to overshoot, the pound having stabilized. Cable has fallen a whopping 2.96% since that statement, the markets intent in showing Carney and the team just what they think about stability.
It had been a quiet week with no material stats out of the UK to provide direction for the pound, which is not always a good thing and Thursday’s 0.57% slide came despite a mixed bag of data out of the U.S, which included disappointing personal spending figures for November, the markets able to swallow the weak inflation numbers with Trump expected to resolve the FED’s inflation issues in the New Year. The only real good news out of the U.S being a better than expected 3rd estimate GDP number for the 3rd quarter, the economy growing by 3.5%.
So, with cable down going into the European session, it makes for an interesting morning session in Europe, with economic data out of the UK this morning unlikely to provide the markets with any inspiration, the data limited to 3rd quarter GDP and business investment figures, which are revised numbers and forecasted to be in line with previous estimates and the 3rd quarter current account deficit, which is forecasted to widen.
Even if the GDP numbers were upwardly revised, the doom and gloom of what lies ahead, acknowledged by the BoE in its economic growth outlook, leaves the pound with little Christmas cheer.
In a recent report I dared broach the topic of parity and we would have to go back to February 1985 for cable’s historical low, when pair touched $1.05. We won’t need too many more 2-3% weekly falls before the markets start making more sizeable bets against the pound ahead of the end of March Article 50 timeline.
The BoE has been clear that it will have to act in the event of any disorderly decline in the pound and we could well see Carney tested going into the New Year, with sub$1.20 levels certainly not unreasonable, particularly if inflationary pressures build and the economy begins to wane.
Inflation continues to be one of the key immediate risks to the UK economy, talk of the BoE having to lift rates would provide some immediate relief to the pound ahead of court rulings in the New Year, which include a possible review of Article 50 and the currently irreversible process.