Three-year high against dollar sparked by housebuilding, but fears remain that exports and manufacturing will be hit
The pound hit a near-three-year high against the dollar on Friday as further evidence of Britain's improving economic outlook emerged, prompting fresh speculation of higher interest rates within 12 months.
Sterling's ongoing resurgence came as figures from the construction industry bolstered chancellor George Osborne's argument that the recovery is on track – with higher than expected growth in December, led by a boost in housebuilding.
The higher value of the pound, which reached $1.67, will cheer consumers who benefit from import costs being kept in check and extra spending power when abroad. But the boost to the currency could counter attempts by the Treasury to encourage exports, to rebalance the economy away from debt-fuelled consumer spending.
Critics of the government's economic policies, which have relied on consumer spending and a boost to the housing market, said the need to rebalance in favour of manufacturing and exports was being undermined by the rise. The situation also posed a dilemma for the Bank of England after it again pledged this week to keep interest rates unchanged until at least the middle of next year, despite forecasts showing acceleration in GDP growth. Analysts said the pound's rise indicated that the markets thought a rate increase might come sooner.
Sasha Nugent, currency strategist at Caxton FX, said: "A combination of not-so-great US data and an upbeat economic outlook is driving sterling higher against the dollar. The markets are not taking the BoE's latest forward guidance too seriously, since they know if the economy keeps growing like it is doing now, the BoE will have to raise rates."
The Bank's governor, Mark Carney, is expected to keep base rates at 0.5% until the middle of next year to support small businesses and first-time homebuyers, who have struggled to secure loans in recent years. The rise in sterling and a jump in the yield on UK government bonds, which widened against US treasuries, reflect the view of traders that Carney will be forced to raise rates earlier than he expects.
Sterling has been rising against a basket of currencies since the beginning of last year when the economy avoided a triple dip recession. A run of strong growth figures has pushed the currency to a five-year high against a basket of currencies including the euro.
Construction figures for the UK bolstered the growth argument on Friday by showing that output increased by 2% in December and 6.3% over the previous year. According to the Office for National Statistics, growth was fuelled by housebuilding in both the private and public sectors, though a lack of maintenance work and slow growth in industrial building held back the pace of the sector's return to health. The Bank of England's revised growth forecast this week was that the UK would grow at 3.4% this year, up from an earlier forecast of 2.8%
In the past year the pound has increased in value against the euro from €1.16 to €1.22 as the UK's recovery contrasted with stagnation in the eurozone. The pound fell against the euro on Friday after GDP growth data showed Germany and Spain pushing the 17-member single currency to a 0.3% rise in the last quarter of 2013, but the euro is expected to weaken again as the UK moves ahead and the Bank raises interest rates more quickly than the European Central Bank.
Moody's Analytics said the strongest rise in eurozone GDP in more than two years should gradually gain momentum over the coming quarters but remain under pressure from highly indebted countries like Greece and Portugal and slow growth in France.
Zach Witton, an economist at Moody's, said: "The eurozone's recovery should gradually gain momentum in the coming quarters but remain under pressure from high private and public debt in troubled member countries. However, high private and public debt in troubled member countries will drag on the recovery as consumers and companies will focus on paying off existing debt rather than incur new borrowing to purchase durable goods and invest in machinery and equipment."
The US has continued to grow in recent months despite bad weather and government austerity cuts, but expectations of a large boost to the jobs total have been dashed. An improvement in the unemployment rate has come largely as a result of workers dropping out of the jobs market, according to official figures.
Currency markets have also listened carefully to the new chair of the Federal Reserve, Janet Yellen, who told members of Congress this week that the US economy continued to improve despite the recent soft patch. Echoing Carney, she said the US economy had plenty of slack and interest rates would stay low for some time.
SterlingCurrenciesEconomic growth (GDP)EconomicsReal estateGeorge OsborneInterest ratesBank of EnglandMark CarneyPhillip Inmantheguardian.com © 2014 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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