Outlook and Recommendation

The economic outlook for the UK has has improved over the last few months. In light of better-than expected results from the PMI surveys (particularly the services index), as well as improving retail sales and trade data, we have upwardly revised our GDP forecast for this year from 0.7% to 1.0%. The main drivers behind the UK's0.9% overall expansion in 2011 were net exports and government spending, while slumping consumption and investment offset the advance. The monthly trade deficit reached its lowest level since 2003 in December, though this was primarily the result of a drop in imports. Household consumption should remain fairly subdued in the near term, constrained by unemployment (at a multi-year high of 8.4%)and still elevated inflation. Although we continue to expect gradual disinflation through most of 2012 (the CPI rate declined from 4.2% y/y to 3.6% in January), the downtrend may not be as steep as previously anticipated, given the recent rise in oil prices and a small possibility of further quantitative easing by the Bank of England (BoE).The British pound (GBP) has surpassed our bullish expectations. The fundamentals remain miserably weak, on both the economic and monetary policy fronts; however the UK has a fiscal plan in place and it's a Triple-A rated sovereign with a developed bond market(a rarity in the current environment). Accordingly, the flow side of sterling remains favorable and should support the currency into year-end.

Revisions to the fourth-quarter GDP figures confirmed the original estimate, the US economy advanced at the fastest pace in six quarters. Over 90% of the advance was accounted for by inventory rebuilding and stronger motor vehicle sales, as supply chain disruptions of the Tohoku earthquake dissipated. However, stockpiles remain historically low, and turnover ratios suggest restocking is occurring at a slower pace than final demand, a reflection of conservative business sentiment. Amid an uncertain global economic outlook, US economic indicators have been more upbeat in recent months, reducing some of the downside risks. This should not, however, be used to extrapolate a stronger growth pattern for the year. The US economy continues to face cyclical and structural headwinds, amplified by the ongoing European debt crisis and the recent surge in oil prices. Aside from a still-cautious sentiment, domestic challenges include fiscal consolidation, political discord, and uncertainty over the presidential election results, and ongoing deleveraging.

The British pound GBP/USD has remained range-bound in February, between 1.5650 and 1.5900, given mixed economic data driven by consumption but offset by balance sheet expansion from the BoE. Although sentiment indicators are bearish with a net short US$3.1 billion position, they have been improving since the fall of2011. We expect GBP to remain a beneficiary of intra-European diversification flows and we hold a Q1 2012 forecast of1.58 and a Q4 target of 1.63.

Central Bank

The Bank of England pulled the trigger on another £50 bln in asset purchases at the February meeting which will take place over three months. The Inflation Report maintained a downbeat growth forecast, though the risks to inflation were seen as broadly balanced despite expectations it would remain below target through much of the forecast horizon. Even so, with inflation projected to be sub-2% into 2015, the risks are skewed toward further easing if the data don't improve over the next quarter. Expect a short statement with no policy changes in March.

Official Rate: 0.50% • Quantitative Easing: Yes • Last Decision: February 8-9, QE • Next Decision: March 7-8, Hold

Historic Chart

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March Major Economic Events

country

date

name

forecast

previous

U.K.

20120305 09:28:00

Purchasing Manager Index Services

54.8

56

U.K.

20120308 12:00:00

BoE Asset Purchase Facility

?£325B

?£325B

U.K.

20120309 09:30:00

Industrial Production (MoM)

0.40%

0.50%

U.K.

20120309 09:30:00

Industrial Production (YoY)

-3.10%

-3.30%

U.K.

20120309 09:30:00

Manufacturing Production (YoY)

0.20%

0.80%

U.K.

20120309 09:30:00

Producer Price Index - Input (YoY) n.s.a

7.10%

7.00%

U.K.

20120309 09:30:00

Producer Price Index - Output (YoY) n.s.a

2.50%

4.10%

U.K.

20120309 15:00:00

NIESR GDP Estimate (3M)

 

-0.20%

U.K.

20120313 00:01:00

RICS Housing Price Balance

 

-16%

U.K.

20120314 09:30:00

Average Earnings

 

2%

U.K.

20120314 09:30:00

Average Earnings

 

2%

U.K.

20120314 09:30:00

Claimant Count Change

 

6.9K

U.K.

20120314 09:30:00

Claimant Count Rate

 

5%

U.K.

20120314 09:30:00

ILO Unemployment Rate (3M)

 

8.40%

U.K.

20120320 09:30:00

Consumer Price Index (MoM)

 

-0.50%

U.K.

20120320 09:30:00

Consumer Price Index (YoY)

 

3.60%

U.K.

20120321 09:30:00

Bank of England Minutes

 
 

U.K.

20120322 09:30:00

Retail Sales (YoY)

 

2%

U.K.

20120322 09:30:00

Retail Sales ex-Fuel (YoY)

 

1.90%

U.K.

20120326 06:00:00

Nationwide Housing Prices n.s.a

 

0.90%

U.K.

20120328 08:30:00

Gross Domestic Product (QoQ)

 

-0.20%

U.K.

20120328 08:30:00

Gross Domestic Product (YoY)

 

0.70%

U.K.

20120329 00:01:00

Gfk Consumer Confidence

 

-29

 
 
 
 
 

USA

20120309 13:30:00

Nonfarm Payrolls

207K

243K

USA

20120309 13:30:00

Unemployment Rate

8.30%

8.30%

USA

20120313 19:00:00

FOMC Minutes

 
 

USA

20120316 12:30:00

Consumer Price Index (YoY)

 

2.90%

USA

20120316 12:30:00

Consumer Price Index Ex Food & Energy (YoY)

2.10%

USA

20120329 13:30:00

Gross Domestic Product Annualized

1.80%

USA

20120329 13:30:00

Gross Domestic Purchases Price Index

2.60%

GBP/USD Pivot Points (Time Frame: 1 Day)

 

Name S3 S2 S1 Pivot R1 R2 R3

Classic
1.5661
1.5742
1.5788
1.5869
1.5915
1.5996
1.6042

Fibonacci
1.5742
1.5791
1.5820
1.5869
1.5918
1.5947
1.5996

Camarilla
1.5799
1.5811
1.5822
1.5869
1.5846
1.5857
1.5869

Woodie's
-
1.5733
1.5771
1.5860
1.5898
1.5987
-

DeMark's
-
-
1.5892
1.5858
1.5765
-
-