Sterling’s Down; It Doesn’t Have to Be Out

(Bloomberg Gadfly) -- Britain’s appalling winter weather has certainly made itself felt. The first estimate of gross domestic product for the first quarter was a sad 0.1 percent.

This sent sterling down a fair way versus the dollar – the Bank of England's May 10 policy decision makes a rate increase, which had been pretty well locked down a month ago, look pretty unlikely.

Sterling’s Down; It Doesn’t Have to Be Out

The weighted probability of a 25 basis-point rise plummeted to around 25 percent.

Sterling’s Down; It Doesn’t Have to Be Out

A separate report on consumer confidence today was similarly miserable. You’d almost start to think that the central bank could never raise rates at any time this year.

Sterling’s Down; It Doesn’t Have to Be Out

The currency reaction makes sense. Still, the pound would be foolish to give up all hope.

Preliminary GDP is often subject to revisions, as less than half of the total data is available. This is why the BOE doesn’t include it in its models. And the numbers have form in turning out better: when similarly dire weather hit in the fourth quarter of 2010, the initial GDP estimate was minus 0.6 percent. That was subsequently revised to a final 0.1 percent reading. Quite a swing. 

And it’s far too soon to say the consumer has given up. The Asda Income Tracker for March showed that, for a second month, consumers’ weekly spending power rose from a year earlier. And with real income growth set to return, this could well be the nadir for U.K. shoppers. The recent bout of sunny weather will have helped by luring consumers into shops, particularly given that there is likely to have been some pent-up demand from February and March. 

Sterling’s Down; It Doesn’t Have to Be Out

Finally, the April Purchasing Manger Index reports will be published next week. These could well prove strong enough to suggest the impact of the storms was temporary. 

The Monetary Policy Committee was split at its last meeting. Its decision next month shouldn't be seen as a foregone conclusion. 

The pound needs concrete evidence of an entrenched slowdown before breaking below February’s low of $1.376.  

It’s a knotty issue for central bankers. But then that’s why Bank of England Governor Mark Carney gets paid the big bucks. 

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the authors of this story: Marcus Ashworth in London at mashworth4@bloomberg.net, Andrea Felsted in London at afelsted@bloomberg.net.

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