Poundsterling continue to slow down against US Dollar since July. It even stays low although yesterday's retail sales show better-than-expected figures. The main cause is uncertainty surrounding Bank of England interest rate hike. But behind it, market players has many more concerns.

Poundsterling continue to slow against US Dollar since July. It even stays low although yesterday's retail sales show better-than-expected figures. Before, the Pounds rebounded after Bank of England monetary policy meeting revealed that hawks members keep voting for rate hike despite of recent drawbacks.

Ekonomi

The UK And The Shopaholics

United Kingdom has the sixth biggest GDP in the world after United States, China, Japan, Germany, and France. The country is one of few trade-driven countries, as indicated by its record as the fourth biggest exporter doubled as the fourth biggest importer in the world. Foreign Direct Investment (FDI) in the UK is also huge, as CIA World Factbook noted that UK has the second highest figure of abroad and at home FDI after United States.

After pioneering industrial revolution in the 18th century, UK slowly turned into center of world trade and finance, with more than half of its citizen work in services. Even so, the economy has several times fell to hard times, with the latest occured during 2008-2010. Since then the UK has crawled back up. The economy started to expand in the end of 2013 and has successfully reached growth around 3% this year.

Pertumbuhan
Because of its unique characteristic as trade-based country, UK retail sales data became one of the most high impact fundamental indicator of the Pounds. In this sense, UK retail sales improvement should be a good news. On October 2014, retail sales increased 0.8% compared to the previous period. Growth was detected on sales from every sector except non-store retailing (online sales). Apart from that, nears Black Friday (November 28th) and Cyber Monday (December 1st) that is known as busy shopping days, UK retail sales is expected to continue to grow in the coming month. Moreover, sales before Christmas historically always high.

 

Concerns On The Pounds

Despite of that, market failed to leap on those reasons. The main cause is uncertainty surrounding Bank of England interest rate hike. But behind it, market players has many more concerns.

 

1. Inflation Expectation Stay Bleak

Inflation refers to constantly rising prices in a certain period. Therefore, retail sales improvement that indicated higher domestic demand should signal higher upcoming inflation. However, the prospect it happens in the UK is relatively dismal. There are two problems here: fall of commodities prices and supermarket price war.

BBC UK reported that fuel prices were at their lowest level since the end of 2010, with average UK pump prices at the end of November stood at 122.5p per litre for unleaded petrol. Along with that, supermarket price war has driven food prices down in the UK. The circumstances indicate the possibility that UK inflation will stay around 1-2% till the end of the year. Furthermore, the Bank of England even warned that inflation could drop to 1% in the next six months. Such indignificant inflation surely will not motivate BoE to hike rates any time soon.

 

2. The Impact of Eurozone Slowdown

In the last policy meeting minutes early this week, BoE officials revealed their concern about the impact of Eurozone slowdown on the UK economy. As a member of the European Union, UK has close trade and investment relations with the Eurozone. Therefore, the concern is not an exaggeration. UK Manufacturing PMI, for example, slumped in August and September along with the Eurozone's, and come back up after the European Central Bank cut rates and started covered bonds buying. Not all sector in the UK is impacted by slowdown, but it is expected to stall UK economic growth for some time forward.

PMI

 

3. Speculation About UK Membership In the EU

UK membership in the EU has been a subject of heated debate in the UK, as bad as the scottish independece controversion. Many people oppose further integration to the EU and demands the UK government to withdraw from the union.

EU membership was claimed to have helped UK economic recovery from the aftermath of 2008/2009 crises, but people are worried that vulnerable economies in the EU periphery would drag UK down. The pressures have pushed PM Cameron to promise a referendum on the matter of UK's EU membership after next year's election.

 

The Fed Will Probably Hike Rates First

Uncertainty surrounding the issues have worried market players. Any spark that denotes UK actual withdrawal from the UK might push capital outflow from the country and push the Poundsterling lower. Meanwhile, as long as it stays unclear, market confidence on the Pounds is under pressures. As well, some institutions have cut their expectation on UK economic growth. BoE forecast placed UK 2015 growth firmly on 2.9%, while HSBC UK recently cut their expectation from 2.6% to 2.4%.

Evidently, uncertainties smothers Poundsterling fundamentals, and the same reason causes some analyst to trim their expectation on BoE rate hike too. One of them, HSBC's chief UK economist Simon Wells mentioned in the latest research note that they expect the first BoE rate hike to happen in the first quarter of 2016, instead of 2015. It means, US the Fed might hike rates first, as most analyst expect them to start hiking rates around mid-2015.