Global FX Update: Sterling Firing Up

The continued slew of positive economic data coming out of the UK is proving a boon for the British pound, which has hit US$1.61/GBP and is up nearly 7% since the beginning of August.

If the current momentum endures, then there is scope for sterling to break through the US$1.65/GBP ceiling, which has prevailed since 2010. The extent and rapidity of the rebound will further pressurise rates across the curve, as the long end responds to firming economic growth and inflation expectations, while money markets continue to price in tighter monetary policy.

In the case of the latter, the economic growth burst, coupled with Bank of England Governor Mark Carney's poorly executed forward guidance policy, have resulted in the short-sterling market pricing in the first rate hike as early as December 2014. We still believe that it is too early at this stage to go completely gung-ho bullish on the UK economy, given that the credit transmission channel is still impaired, disposable incomes remain under pressure, and the surge in house prices risks prompting a premature tightening in money policy.

That said, these are issues of concern for the medium-term recovery. The current burst in economic activity is being well received by the markets, and is offering the potential for bullish equity and sterling positions.

This Week's Trivia Question

Last week's question was follows: Syrian President Bashar al-Assad had an elder brother called Basil, who was the heir-apparent to the presidency before his death in a car crash in 1994. Which other current Head of State, who has in recent years successfully defeated his country's rebels in a long-running civil war, also has a brother called Basil who is a politician? The country in question is in Asia.

Answer: Sri Lankan President Mahinda Rajapaksa.

This week's question mixes a bit of history and popular entertainment, and is as follows: which individual connects a cinematic portrayal of US General Douglas MacArthur and the American occupation of Japan with a mysterious island in the South Pacific?