Pound Sterling Forecasted to Pause vs Euro and US Dollar: Exchange Rate Markets Latest

Stellar gains were seen on Tuesday after it was shown that UK inflation ticked higher than analysts were expecting - the implications of high inflation are interest rate rises at the Bank of England which in turn pushes up the currency as money flows in to take advantage of higher interest rate yields.

However, Lloyds Bank Research point out that Wednesday's employment data confirmed pay rises for the UK workforce remain subdued, and therefore inflationary pressure is unlikely to be worry for the BoE at this stage. As we approach the weekend we will be watching geo-poltical events for guidance. As yet both Gaza and the Malaysian airliner tragedy have had little impact on sterling.

On Friday the GBP currency exchange rates are as follows:

• The pound sterling to dollar exchange rate is flat at 1.7104.
• The pound sterling to euro exchange rate is 0.04 pct lower at 1.2639.

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Time for a pause to the pound sterling rally?

The employment figures came in strong with those claiming benefits falling by 36.3 thousand, analysts had only predicted the number to fall by 27 thousand.

However, for currency traders the lack of wage growth was a concern. Lloyds Bank Research tell us sterling could be due a pause as a result:

"The weakness of wage growth was once against the main weak spot in the data, and with wage growth at 0.3% y/y (including bonuses), the lowest y/y rate since 2009,  it’s very hard to see the MPC concluding there is any inflation danger brewing in the labour market.

"While there are other reasons why some may see a need for higher rates (e.g. housing market strength) these are unlikely to be enough to gain majority support.

"So for now GBP strength may need to pause until there is some evidence of genuine inflation pressure. Momentum seems to be flagging both against the USD and EUR."

Pound euro rate forecast higher, despite weak pay growth

Despite the caution shown at Lloyds concerning inflation there is no shortage of analysts warning the the pound to euro exchange rate could rise yet further.

Commenting on the EUR/GBP's outlook Piet Lammens of KBC Markets says:

"Recently, EUR/GBP stayed within reach of the cycle lows, but the decline slowed. The UK news was a bit more mixed and the negative headlines from Europe had no big negative impact on the single currency.

"However, yesterday’s jump in UK inflation brought sterling back to the recent highs against the euro and the dollar.

"The standing EUR/GBP downtrend remains intact and the day-to‐day momentum turned again sterling positive after yesterday’s UK inflation report. Even so, the UK data will have to be strong to inspire a new sterling upleg. We maintain a sell‐on‐upticks bias."

US Dollar strength returns

The pound dollar exchange rate has ticked lower from the highs seen on Tuesday. All-round USD strength, "came thanks to comments from the US Federal Reserve Chair Janet Yellen’s at her testimony to the Senate Banking Committee," says Carl Hasty at Smart Currency Business.

In it, she stated that that there was significant slack in the labour market and most importantly, she stated that if the labour market continues to improve quicker than anticipated then interest rates may rise sooner than currently envisioned.

Furthermore, she indicated that when the interest rates do start to rise, they could rise quickly.

Regarding the outlook Hasty says:

"The US dollar remained strong against most currencies in spite of retails sales figures disappointing yesterday, showing growth of only 0.2% for the month. On a more positive note, manufacturing data came out better than expected."

US dollar needs more good economic news

The outlook for the dollar against both the euro and pound will of course depend on strong economic data releases.

Lloyds Bank tell us they doubt that there is yet enough substantive news for these ranges to break in the short term:

"Yesterday’s US industrial production data was adequate rather than strong, and the Beige Book overnight fairly downbeat, so more encouraging data is needed if the USD is to make a renewed attempt on the upside.

"Today’s housing starts and jobless claims numbers could therefore be more significant than usual, and stronger than expected data could provide the necessary push to trigger stops around 1.35 in EUR/USD. Nevertheless, we would still expect it to be difficult for the USD to sustain significant strength if the Q2 GDP data do not show a big reversal of the Q1 weakness."