Interview given to Pro Finance by Paul Robinson, Chief Sterling Strategist at Barclays Capital. 19.02.2008.
The market is expecting a number of economic data to be published in the nearest couple of days. Could you underline the most important reports among those that will be published on Wednesday and tell us what we should expect from the UK retail sales report scheduled on Thursday? What might they mean for British pound?
I think that probably the most important data still comes from the USA, in particular, we have the January CPI numbers published on Wednesday. Obviously, there is a lot of concern about the US economy slowdown, but there are some other factors that should never be overlooked and the elevated inflation is certainly among them. We expect that in January the headline CPI continued to accelerate on a year-to-year basis to 4.2% (ProFinance.com note: according to the median forecast of the economists polled by Reuters). Another fairly important data is the housing starts report. The house market in the US is really weak, and, I think, the market participants will pay much attention to these numbers. Also FOMC minutes published on Wednesday can be of interest as well. In the UK we have the Bank of England minutes form the last interest rate decision meeting which also come out on Wednesday morning and are certainly worth looking at. We believe that they will reflect the complete unanimity of the MPC members. On Thursday the UK retail sales report will be published, which will probably come out very weak. We expect the January numbers to fall 0.2% on month-on-month basis to 4/2% y-on-y (ProFinance.com note: the market consensus is +0.1% m/m to +4.7% y/y) due to the sales decrease during Christmas holidays (that include a part of January) on the back of the UK economy deterioration and consumer confidence erosion. In general, I don't think that the macroeconomic data this week will have any significant impact on the British currency. If the US data come out worse than currently expected by the market, we might witness a new wave of risk aversion, which may lead to negative consequences for the pound. Probably, retail sales report is the most important data in terms of currency movements, thus if we are right in our forecasts, the market reaction will be negative, though, maybe, not that strong.
Lack of economic data during the last couple of days made the market participants to focus on the Northern Rock issue and on the bank quarterly reporting. Do you think that the economic releases will be able to grab the market attention, or the banks' reporting will still be a strong driver?
I believe the banks' reporting will remain a market driver for a while. In the last eight month the financial sector reporting as well as banks exposure to the mortgage securities have gained importance for the equity market and the financial markets as a whole. I don't think the situation will change any time soon. Lack of significant macro data allowed the financial reports to dominate, and they are not to be lost in the shadow of the important economic reports.
Apart of the banks' reporting, the news of possible nationalization of Northern Rock was widely discussed. What is your opinion on the situation?
I feel that the whole story about this bank was objectively negative for the British currency, as the government's inability to solve the problem with the help of private sector gave an alarming signal to the investors.
British pound and euro gained ground against US dollar last week. Though the pound started week on a weaker footing. Do you think the British currency can be described as undervalued to euro. Can it claw back its position if the European banks that also publish reports this week, show substantial losses?
I don't think that the pound is undervalued against euro. This won't be the case unless EUR/GBP reaches the area of 0.77. Current levels are quite acceptable, though, probably, the pound can be regarded as slightly undervalued. As for the banks' reporting, I think the news about substantial write downs could have a negative impact on euro, though I think we have no reasons to expect such data. I don't believe the British currency will gain ground against euro. I also doubt that the pound will be able to recover to 2.00 against the dollar, as the downside scenario looks like the line of least resistance. We expect GBP/USD to fall to 1.91 on 3-month basis and believe that the pair will move to 1.91/92 in the end of the 1st quarter before the retreat to 1.93. EUR/GBP will stay close to current levels within the range of 0.75/76.
Mr. Robinson was interviewed by Dmitry Khrabrov ProFinanceService.com