Crunched: GBP Slumps vs USD & EUR as Bank of England Pushes Back Interest Rate Rise to Spring 2015
- Written by: Gary Howes
-
The pound had initially benefited in the run up to the employment data as investors positoned themselves for a potential pro-GBP outcome, however this was not the case and the selling was deep.
Following the employment data and inflation report in the mid week session we see the following levels on Friday:
- Pound to euro exchange rate (GBP/EUR): 0.11 pct lower on a day to day basis having reached 1.2474. It was at 1.2602 before the mid-week releases.
- Pound to dollar exchange rate (GBP/USD): 0.03 pct lower at 1.6681. It was at 1.6825 ahead of the slump.
- Euro to dollar exchange rate (EUR/USD): 0.07 pct up at 1.3374.
Be aware that these are mid-market quotes and they will attract a discretionary spread from your bank. Hence the rate you see is not the rate you get.
However, an independent FX provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Find out more.
Latest: No interes rate rises as Bank of England puts focus squarely on wage growth
The Bank of England has officially become a flip-flopper under the guidance of Mark Carney.
When the Governor introduced his forward guidance policy he said rates would rise only when unemployment fell below 7%. The policy was quickly thrown out the window when the unemployment rate fell faster than expected.
The new indicator to watch out for now is wage growth which is seen as reflective of 'economic slack' - that hard-to-define bogeyman that the Bank is trying to eradicate. It is also the last excuse against raising interest rates for a naturally dovish Bank of England.
"In light of the heightened uncertainty about the current degree of slack, the Committee noted the importance of monitoring the expected path of costs, particularly wages," the BoE said in its quarterly Inflation Report.
What we can take away from today is that we are probably not as near to an interest rate rise as suggested by Mark Carney in his Mansion House speech which saw sterling rally as markets raced to reprice for an early interest rate rise.
Expect further GBP weakness as guidance at the Bank appears to have back-tracked on this stance, markets are now pricing in a rate rise around Spring 2015.
Latest: Employment data disapoints
Those seeking unemployment benefits fell by 33.6 thousand, better than the fall of 30 thousand expected.
However, it is the growth in wages that everyone is interested in - this is proving to be an economic recovery without benefit as the UK population surges meaning the pie has to be split between more people.
Average earnings with bonuses fell 0.2%, a fall of 0.1% was expected.
GBP Outlook: Awaiting the Bank of England
"A major driver of sterling strength or movement today is likely to be the investors positioning themselves ahead of the Bank of England (BoE) inflation report and the address from Governor Mark Carney on Wednesday," says Carl Hasty at Smart Currency Business.
Carney has been clear in stating that increases in interest rates will be slow and gradual; however, Hasty says markets are still unclear on when exactly these rate rises will begin.
This uncertainty over interest rates is now being reflected in GBP weakness.
"Future interest rate increases have been a key factor in causing sterling’s rise over the last 12 months and some are now moving to the opinion that this is fully priced into sterling and further delays will cause a reverse in the trend. Any indication on Wednesday as to when the first interest rate hike might occur is likely to have a strong effect on sterling performance," says Hasty.
If you are looking to buy or sell sterling, Smart Currency Business suggest contacting your trader now for live rates, news and currency-purchasing strategies.
Don't Forget Employment Data and Salary Figures
It is not just the Bank of England that dominates the outlook for GBP.
The pound to euro and dollar pairings will be guided by the monthly release of labour market statistics.
Don't look at the employment rate, rather focus on the rate of salary growth.
This has been a major concern for the Bank of England who see the inability of salaries to grow as being indicative of continued under-performance in the economy.
Analysts reckon that the Bank will be less inclined to raise interest rates until salaries start growing.
Average Earnings including Bonus (3Mo/Yr) (Jun) is predicted to fall by -0.1 pct, compared to the 0.3 pct growth seen in the previous month.
At this rate the financial situation facing UK workers continues to deteriorate as inflation outstrips jobs growth.
Technicals: Is the USD About to Suffer a Setback?
Bank of America Merrill Lynch's MacNeil Curry sees the potential for a USD setback:
"US $ to correct as risk recovers. Look to buy the US $ dip. With equities and treasuries correcting, the US $ should also suffer a corrective setback.
"Indeed the US $ Index is showing signs of near term stalling, especially against emerging market and commodity currencies. However, pullbacks must be seen as corrective.
"Beyond the short term swings, we remain bearish and short €/$ for 1.3212 ahead of 1.3104 and below. In the week ahead we will look to buy the US $ on a pullback, ideally against the NZD and INR. NZD/$ in a medium, if not long term bear trend targeting the 0.812/0.8067 zone, while $/INR targets 62.46 ahead of 62.98 and potentially beyond."