The pound rose in value versus its major currency counterparts on the interbank market this week, including the euro, US dollar and Australian dollar. In part, this is because there have been signs of rising business optimism in the UK, as well as reports that Britain’s job market held up surprisingly well in December.
It’s thought that this upbeat news raises the odds that the Bank of England (BoE) will maintain UK interest rates at 0.75% when it next convenes on January 30th, which in general supports sterling. However, the key test will come today when IHS Markit releases its “flash” PMIs (Purchasing Managers’ Indices) for January for UK services and manufacturing.
These will provide the first concrete indication of whether the UK economy has picked up in early 2020, following last month’s decisive general election result, and could weigh decisively in the BoE’s interest rate decision next week.
To begin with, this week we learnt that the Confederation of British Industry’s (CBI) Business Optimism survey for January 2020 has shown a surprising increase.
UK business sentiment jumped to 23 this month, well above December’s -44, the highest result since early 2014, around six years ago. This suggests that, following last month’s clear election result, companies feel brighter both about the UK’s political stability and Brexit outlook.
CBI’s optimistic survey follows Deloitte’s CFO poll earlier in January, which showed an “unprecedented rise in business sentiment”. This bodes well for the UK’s GDP (Gross Domestic Product) growth this year, so this has boosted the value of the pound.
Moreover, this week we also found out that the UK’s labour market held up surprisingly well in December. To begin with, the unemployment rate remained at 3.8%, its joint-lowest since the mid-1970s or around 45 years.
Also, the UK created 208,000 new roles in the three months to December, well above forecasts for 111,000 fresh positions. Lastly, UK wages including bonuses rose by 3.2% in November, +0.1% above forecasts, and well above inflation that month of 1.5%.
So this tells us both that companies continued to hire at the end of last year, in spite of the Brexit uncertainty, while Britons living standards’ improved. This too has supported sterling on the interbank market.
However, as I say above, it’s today’s PMIs that may determine whether the Bank of England maintains UK interest rates at 0.75% on January 30th. This is because the PMIs give us the first concrete indication of the UK’s economic performance this year, next to this week’s business confidence surveys.
If the PMIs show a rise in business activity, the BoE may feel more inclined to keep interest rates steady, and otherwise vice versa. The PMIs are released at 09.30 GMT.
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