TODAY is jam-packed with economic data: the Monetary Policy Committee (MPC) minutes are released at 9.30am and George Osborne unveils the Comprehensive Spending Review (CSR) at 12.30pm.
All this activity seems to have unnerved sterling traders. The pound dropped 0.2 per cent to $1.5844 and 0.1 per cent to 88.40p per euro yesterday morning. Some are suggesting that traders have closed their positions in fear of the effect of further quantitative easing (QE) from the MPC and the extent of Osborne’s budget cuts. While this sounds like sterling could be preparing to tumble, most commentators regard this as a typical “event risk” sell-off – a reaction that comes into play in the lead up to major events regardless of the expected outcome. The broad expectation is, in fact, that the pound will return to the $1.55-6 level against the dollar and fall back into range against the euro.
George Osborne’s pledge to hack £156bn off state spending has pleased the market up until now. This is evident from sterling’s bounce-back against the dollar and the euro after both the election and the emergency budget. The market clearly likes cuts, and as Neil Mellor of the Bank of New York Mellon says: “If anything, there’s a feeling that the cuts won’t be aggressive enough and that might disappoint.” After today’s immediate-reaction volatility it would be reasonable to expect the CSR to reassure the market that the government is still on track to slash spending.
If George Osborne sticks to the headline numbers given in his emergency budget there should not be any surprises for the market since all the relevant information is already known. Mellor says: “The market doesn’t care how many bureaucrats get fired from what department, this is micro information that won’t matter to the trader.”
Analysts have much the same feeling about the MPC meeting. Despite the hype, further QE is unlikely to be announced. Ross Walker, RBS’s UK economist, says: “Perhaps the [MPC] members are playing us with a straight bat – they don’t like to drop hints, but it seems as if [Adam] Posen is the only dove, the others sound pretty neutral. My guess would be that the others are waiting to see the inflation report.” The GDP and Purchasing Managers Index (PMI) figures out next week are more likely to give a steer on the probability of more QE.
The immediate market reaction will offer traders a bumpy ride. Sterling’s direction will be a tough call and most analysts refrained from making one. A strong feeling and a lot of confidence could make you a quick buck, but as David Jones of IG?Index warns the uncertainty deters most traders.
Traders should not let sterling’s wobble over the last few days knock their strategies off course. Today’s volatility might be unpredictable, but the long game looks fairly straightforward for sterling.