The British pound is higher against the US dollar on Wednesday afternoon in a significant move to the upside as markets took the latest economic data to mean a UK rate cut is unlikely this month. More broadly, stock markets in the US and UK were higher on high hopes for US earnings season while investors looked past the coronavirus outbreak in China.
GBP/USD was higher by 89 pips (+0.68%) at 1.3133 with a daily price range of 1.303 to 1.313 as of 1.30pm GMT, as the currency pair soared back above the 1.31 level.
Market expectations for a rate cut this month by the Bank of England have been sliding over the past twenty-four hours. In the space of a day, market pricing has moved from implying a rate cut to 50/50 odds to the present scenario where rates being kept steady is more likely. By extension, if it doesn’t happen this month before the departure of Bank of England Governor Carney, future rate cuts also look a lot more in doubt.
The UK employment rate at a record high of 76.3% has cast major doubt over recent talk of a January rate cut. As a reminder, a central bank will typically cut interest rates when an economy is performing poorly to encourage borrowing and raise interest rates to stop an economy overheating by making it more costly to borrow. Employment at its best level on record is of course not typically associated with a poorly-performing economy.
The move higher in the pound accelerated following data published by the Confederation of British Industry (CBI) showing UK manufacturing activity on the rise at the start of the New Year. In an amazing turnaround in sentiment, the ‘Quarterly Business Situation index’ which gauges optimism in the industrial sector printed its best reading since April 2014. An addition the CBI’s ‘Headline order book’ balance rose to the highest since August.
Later Wednesday, retail sales and housing data are released in the US. The Housing Price index is expected to show a 0.2% rise November, unchanged from the month prior. Existing home sales for December are forecast at 5.43M, up from 5.35M in November.