• 844 days Will The ECB Continue To Hike Rates?
  • 844 days Forbes: Aramco Remains Largest Company In The Middle East
  • 846 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,246 days Could Crypto Overtake Traditional Investment?
  • 1,250 days Americans Still Quitting Jobs At Record Pace
  • 1,252 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,255 days Is The Dollar Too Strong?
  • 1,256 days Big Tech Disappoints Investors on Earnings Calls
  • 1,257 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,258 days China Is Quietly Trying To Distance Itself From Russia
  • 1,259 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,263 days Crypto Investors Won Big In 2021
  • 1,263 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,264 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,266 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,266 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,270 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,270 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,271 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,273 days Are NFTs About To Take Over Gaming?
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

  1. Home
  2. Markets
  3. Other

Sterling Strength and 'Real' Differentials

The British pound is the best performing currency so far this quarter (+2.0% vs USD) as well as over the last 6 months (+5.7% vs USD) out of the top-traded 11 currencies.

Real differentials in 2-year govt bond yields (yield minus inflation) have helped explain currency performance over the last 2 years, including sterling's strength since last autumn.

Such yield superiority is underscored by higher gilt yields and moderate inflation.

Currency performance is best measured against gold to highlight common denominator. Chart shows gold has fallen the most against GBP, -19% since May 6, 2013.

The simultaneous decline in UK inflation and unemployment rates, as well as the increase in real wages (earnings minus CPI) reflect the importance of GBP strength in maintaining inflation expectations anchored within the BoE's target at a time when further tightening in labour markets emerged alongside the slow but gradual expansion in UK growth.

FX % change versus Gold since May 6,2013

Despite US 2-year yields exceeding their German counterparts by 0.27%, they're not sufficiently priced to account for the higher inflation differential with the Eurozone, considering Eurozone CPI at 0.7% y/y and US core PCE at 1.2%. This helps explains EUR outperformance of US.

The index of economic surprises in the UK continues to exceed that of the US, Japan, Germany, Canada and China. Wage growth is closing the gap with inflation and business surveys have remained robust after hitting multi-month highs earlier this year. Not only these figures (including positive real wage growth) will favour PM Cameron's re-election bid next year in showing the positive spillover from the City onto main street, but they will translate into an added boost to finally see a break above $1.69 in GBPUSD.

For these reasons, we continue to expect NO verbal intervention from the Bank of England regarding sterling strength. If anything, the market will likely keep on buying sterling on the dips based on the classic combination of improved growth-low inflation. $1.7130 is now our objective and any decline below $1.66 is behind us for now.

Best

 

Back to homepage

Leave a comment

Leave a comment