The British pound is heading toward calm today against the US dollar, with gains of about 0.05% at approximately 9:00 a.m. GMT and settling near the 1.273 level, after a series of gains extending for four days.
The pound also completes its sideways path that has been extending for about a month against the euro, near the level of 0.85576.
The calmness of the pound sterling today came with the sharper-than-expected slowdown in house price growth last February, which was also the first slowdown in months, according to the Halifax House Price Index.
House price inflation slowed for the first time since November months to 0.4% on a monthly basis, which was below the expected 0.8%. On an annual basis, price growth declined to 1.7% from 2.3% in January, which is the first slowdown since September.
This slowdown in housing price growth came after signs of a further recovery in demand in the real estate market, with construction activities slowing at the slowest pace since last August and approaching a halt to contraction, with a reading of 49.7 for the S&P Global construction PMI.
While the S&P Global report indicated that the recovery in demand in the real estate market was marginal in February, new business has accelerated significantly to the highest level since last May, in addition to the highest levels of confidence about growth in the coming months in a year.
The UK real estate market appears to be able to hold together more than we had imagined, as it is slowly heading to growth – with the exception of commercial real estate activities – despite the highest mortgage rates since before the turn of the millennium.
Restoring growth in the real estate market in a sustainable manner may not be very close, with the lagging effect of monetary tightening taking some time to materialize.
Therefore, the troubles facing the real estate market are not over yet. With expectations that inflation will continue to decline and reach its target of 2% in the coming months, we will be facing a further rise in interest rates and real bond yields, that is, a further rise in real financing costs.
Real rates are already high and in positive territory and may rise further as economic growth picks up. The inflation-adjusted interest rate is at 1.25%, the highest since 2008, and the real yields on ten-year bonds are also just barely above zero, but they are not far from the highest levels since 2016, having reached more than -7%. In late 2022.
The real interest rate (top) and the real yield on ten-year government bonds (bottom). Source: TradingView
The pound also benefits from the optimism of decision makers about the future growth of the British economy, who yesterday took more steps to support through a cut in income taxes and the trend and expectations of reducing the budget deficit in the coming years.
Today, we await the speech of the President of the European Central Bank, Christine Lagarde, following the announcement of the interest rate decision, which is expected to result in no change in the current rates. While Lagarde’s talk about further slowdown in wages and inflation may be a factor putting pressure on the euro in the face of the pound sterling.
The pound may also benefit in the event of a more severe slowdown than expected in the performance of the labor market in the US with the data expected tomorrow with the new NFP data. It is expected that the US economy added 198,000 jobs in February, down from 353,000 in January, in addition to recording a slowdown in Average Hourly Earnings to 0.2% on a monthly basis from 0.6% in January as well.
