THE HEDGEYE EDGE
Our bullish call on the British Pound was borne out of Hedgeye’s Q4 2013 Macro themes call. We continue to believe that the health of a nation’s economy is reflected in its currency. The Pound has benefitted from the UK’s fiscal discipline to embrace austerity before its regional peers during the global recession – a policy decision that is paying off in spades through accelerating growth above its European peers. Additionally, we expect a stronger currency to increase consumer spending power by deflating imported inflation.
Incidentally, our bullish call on the British Pound versus the US Dollar was further strengthened today with the European Central Bank unexpectedly cutting its main interest rate by 25 basis points to a record low of 0.25%. From our perch, it’s now anyone’s guess how the central bank currency wars between the USD and EUR will play out. However, anchored on our Q4 2013 Macro theme of #EuroBulls (presented on 10/11/13), we continue to like the British Sterling.
Finally, data out this week showed the UK Services PMI for October hit a 16-year high at 62.5 (above 50 = expansion), an outperformance over its peers. Our call for #GrowthAccelerating in the UK is now showing up in economic forecasts: the European Commission in its autumn report this week raised UK GDP expectations, to +1.3% in 2013 from +0.6% and to +2.2% in 2014 versus a previous estimate of +1.7%.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
Additional bullish signals include the slope of UK economic growth, just clocking a 3-year high, and the British stock market (FTSE) is breaking out to new highs. The fundamental data, from business and consumer confidence to retail sales and manufacturing, continue to confirm the improving growth environment we’re forecasting.
Taken together, we expect a continuation of this positive data to propel the Pound higher.