Pound Remains Weak After King And Cameron

David Cameron’s delayed speech on the EU is due today at 8am and it is widely acknowledged that he will promise an in/out referendum by 2017. Caught between the rock of his conservative progressivism and the hard place of the Daily Mail waving back-benchers, Cameron’s decision should be clear; we stay.
Firstly, the UK’s economic footing is by no means secure enough for us to even hint at an exit from the EU let alone actually go ahead with one. While our debt/GDP levels are relatively good by EU standards factoring in the amount of household debt elevates this level to one of the worst globally. His Chancellor’s plan to retool the UK economy via “a march of the makers” has failed spectacularly, despite the support of a central bank that has been in the business of weakening its currency for the best part of 4 years.

The uncertainty around the UK’s position within the EU is adding to the swirl of negativity the pound is going through at the moment. Another speech, delivered last night in Belfast by Mervyn King, also served to undermine sterling.

King has a habit of weakening sterling when he speaks; it’s as reliable as the sun rising in the east and we weren’t let down yesterday. Apart from his hinting that Friday’s GDP numbers would be “considerably weaker” than they were over the summer of last year, he acknowledged that the Bank of England is ready to add more QE to the pot if it deems it necessary.

The most interesting part of the speech was a tacit admission that the inflation targeting strategy may need changing. This follows the Fed’s targeting of QE via the unemployment rate known as the “Evans Rule” – I wonder whether we will see some chatter around that in today’s Bank of England minutes (09.30) or ahead of next month’s inflation report.

Sterling fell by around 40pips versus the euro in the aftermath of the speech and a similar percentage versus its crosses.
Unemployment data from the UK today is unlikely to see GBP rocket back unfortunately. The job losses from Comet moving into administration will be part of these figures, whilst the HMV, Blockbuster and Jessops figures will be part of next month’s. The most important factor in our eyes is the likely decline in the rate of wage increases.

Average weekly earnings rose by 1.8% in November but are only set to expand by 1.6% in December. With inflation heading the other way following food and fuel inflation, the pressure on the pockets of us all is only going to get greater.

JPY continued to strengthen in the aftermath of the disappointing Bank of Japan meeting Monday night. We think that this correction lower may continue in the short term, but the longer term trend of a weaker yen will continue later in Q1. BOJ governor Shirakawa is due to leave his post in April alongside two other members of the rate setting committee; speculation over their replacements is the likely catalyst for further JPY weakness.