Yesterday was a good day for British pound investors. The currency gained across the FX dashboard on positive economic data.
GBP/USD rose close to two big figures (i.e., 200 pips points), GBP/CHF too, and EUR/GBP dropped. All these market moves express investors’ confidence that the UK economy is on the right track.
But more importantly, the market moves put the Bank of England’s March decision in a hawkish place. Another 25bp seems in the cards as the FX market usually moves in anticipation.
So why would the Bank of England keep rising? Here are two reasons to consider:
- Core services inflation is stubbornly high
- UK private sector returned to growth in February
Core services inflation continued to rise
Inflation exceeds double digits in the UK, which is the main reason for the Bank of England to tighten. But recently, it cooled off, following improvements seen in other developed economies.
Nevertheless, core services inflation remains stubbornly high. According to the most recent forecasts by the Bank of England’s staff, core services inflation is seen rising to 7% from 6.5%.
Why is this important?
The UK economy is a service-based one. Therefore, until the services inflation comes down, the fight against inflation is not over.
Hence, the Bank of England should continue tightening, thus, the British pound should find buyers on every dip.
UK private sector returns to growth
As mentioned in the first part of this article, yesterday was a particularly good day for UK economic data. PMIs for February surprised to the upside, showing that the UK private sector returned to growth last month.
More precisely, PMI Services climbed to 53.3 – well into expansion territory and to an 8-month high. Moreover, the report noted that the survey respondents are optimistic about the future, citing strong demand for business services due to improving global economic outlook and reduced domestic political uncertainty.
Finally, even PMI Manufacturing came out better than expected, at 49.2 vs. 47.5 expected.
All in all, the Bank of England has a green light to deliver another rate hike in March. So where will the British pound go?
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