- The British pound soars yet again, this time driven by a strong UK manufacturing PMI report.
- The latest UK manufacturing PMI confirms ongoing and even increasing economic strength.
- This report suggests that the Bank of England must hike rates this year, even into the teeth of a soaring British pound.
The British pound (NYSEARCA:FXB) responded so strongly to the June Markit/CIPS UK Manufacturing PMI® report that I decided to read it and go beyond the headlines. I found a report full of superlatives that suggests to me, and apparently to financial markets in general, that the Bank of England (BoE) will indeed have to start hiking rates in 2014. The BoE cannot wait until next year per original forecasts. The Bank of England seems certain now to raise rates sooner than the market previously expected.
The British pound continues to soar, particularly against the U.S. dollar
Here is a list of the superlatives from the June report (all direct quotes):
- At 57.5 in June, up from 57.0 in May, the headline seasonally adjusted [PMI] posted its second-highest reading in 40 months, bettered only during this period by last November's 57.8.
- The average index reading during the second quarter is the highest since Q1 2011.
- Manufacturing output increased for the sixteenth successive month in June.
- The average pace [of growth] over the second quarter as a whole was the strongest for 20 years.
- The level of incoming new business rose…to one of the greatest extents since the survey began in 1992.
- Manufacturing employment rose for the fourteenth successive month.
I remain "non-bullish" on the pound. I think that once the first rate hike finally comes, the BoE will insist that a tightening cycle is not underway. Instead, the BoE will say the rate hikes are a simple acknowledgement of the sustainability of the burgeoning recovery. The BoE will try to communicate that it will stay careful not to allow rate hikes or expectations of rate hikes to squelch the recovery. This will extend to a currency that gets too strong. The BoE will not be able to act against the rising tide in the currency, but I am guessing by the time of the rate hike, the market will have priced into the British pound the most likely scenario for the path of monetary policy over the next 6 to 12 months. Until then, I think it is unwise to short the British pound under most circumstances. It is also risky to chase rallies aggressively. In other words, buying the dips seems like the reasonable path for trading FXB until we see how the market reacts to the first rate hike and the messaging around it.
Be careful out there!
Additional disclosure: In forex, I am long the British pound.