The pound has recovered from declines in the second half of August to climb back above US$1.57/UK£ on our survey date. Its upturn came as the prospect of further quantitative easing dimmed amid signs that the economy is gaining momentum. Improved activity in the manufacturing and service sectors in July and August alongside upwardly revised GDP growth of 0.7% (q-o-q) in Q2 has caused some to doubt that interest rates will be kept at record lows under the conditions set by central bank forward guidance. Critics expect inflationary pressures to build as demand strengthens, raising questions over the suitability of current rate levels, should they not be considered for an increase until the unemployment rate falls to 7.0%. The Bank of England held rates at 0.5% on September 4 although bond yields have steepened on expectations that they may be raised sooner than expected. Upbeat data releases across the economy have enabled the consensus to raise its GDP growth forecast for 2013 to 1.3%. In addition, the outlook for 2014 has improved, while inflation is set to remain above the 2% target set by the government. In its recently published triennial survey of foreign exchange markets, the Bank for International Settlements data showed that the UK remains the largest centre for foreign exchange activity, accounting for 40.9% of global turnover. However the proportion of trade carried out in sterling has dropped a little over the past three years, partly because of more prominence in emerging currencies like the Chinese renminbi.
First Published on September 11, 2013.
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