British Pound (GBP) Seen Sliding Away from Best Exchange Rates of 2014

british pound GBP exchange rates

The best GBP exchange rates of 2014 are falling well out of reach on Wednesday as sterling is hammered by disappointed traders.

The Bank of England told markets that they are in no rush to raise interest rates while the UK employment picture is confirmed to be strong.

However, the employment data missed expectations and expectations are what really count in the world of forex. The result are the following rates:

Sterling to Euro exchange rate: 1.1964
Sterling to US dollar: 1.2565
Sterling to Australian dollar: 1.9433
Sterling to Canadian dollar rate: 1.7694
Sterling to New Zealand dollar rate: 2.1565
Sterling to South African Rand rate: 22.8601

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Why is the pound under pressure?

The Bank of England confirmed to markets in their latest Quarterly Inflation Report that they are happy with the pace of recovery in the British economy. However, the improvement does not yet warrant a rate hikes and the Bank said that with the soft inflationary environment they would only consider gradualy rate hikes in 2015.

Meanwhile, the UK unemployment rate fell to 6.8% as expected, however all other elements of the report missed expectations.

The claimant Count fell by 25K, but analysts wanted to see it fall by 30K. Job growth came in at 1.7%, analysts predicted 2%.

Is this bad for the long-term outlook?

No, not necessarily. The British pound is already at extended valuations and offering some of the best exchange rates in years, depending on what pairs you are watching.

A pullback is certainly to be expected when data releases don't meet expectations.

According to CIBC and Nomura sterling’s world-beating rally is on hold as investors wait for signals from Bank of England Governor Mark Carney quarterly Inflation Report today, on the timing of higher borrowing costs.

"Sterling initially rose to the strongest level in 16 months versus the euro, yet fell against all but two of its 16 major peers, even as an industry report showed a gauge of retail sales unexpectedly rose by the most in three years in April," note brokerage Afex.

GBP gained versus all of its G10 peers in the month. UK Government bonds rose.

"Sterling gained versus 13 of its 16 major peers as analysts predicted data will show the jobless rate dropped to the lowest in more than five years UK Government bonds were little changed before Carney presents updated economic forecasts, having seen his forward guidance on the future path of interest rates voided by declining unemployment," say Afex.

Money markets show investors are betting the central bank will raise borrowing costs by March.

Bundesbank Could Support Easing at ECB

The euro is the other global under-performer this week with reports that the the Germans may support further stimulus at the European Central Bank.

The Bundesbank’s support for any more stimulus for the Eurozone won’t be automatic even if the ECB cuts its inflation forecast for 2016, two people with knowledge of the matter said.

The fact that it is even being considered is however seen as reason to sell the euro.

"While the German central bank will focus on the outlook for price stability at the end of the ECB’s forecast horizon and is open to a package of measures from a negative deposit rate to halting the sterilisation of crisis-era bond purchases, nothing is decided yet, said the people, who asked not to be identified because the matter is private," note Afex.

ECB President Mario Draghi said last week that the Governing Council is “comfortable” about taking action at the June 5th monetary policy meeting, when it will publish revised macroeconomic projections. The Wall Street Journal reported earlier that the Bundesbank is open to significant stimulus if officials lower their inflation outlook for 2016.

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