Pound Sterling Suffers as 2015 Rate Hike is Ruled Out

GBP falls despite wages increasing faster than inflation and unemployment falling faster than predicted.

The British pound (GBP) has fallen against the majority of currencies on Wednesday despite some encouraging economic data releases.

The pound euro exchange rate is seen trading at 1.3050 at the time of writing, down from .1.31 earlier.

The pound dollar exchange rate is meanwhile also softer at 1.5111. "GBP/USD remains in danger of breaking out of its recent range and drop to 1.5000 psychological support," point out Forex.com.

Why is the GBP Lower?

Sterling was sold off in response to the release of the minutes of the Monetary Policy Committee (MPC) meeting held in early January.

Members of the Bank appear decidedly less willing to raise interest rates in 2015 than they were at the meeting held in the previous month.

Central bank policy and interest rates are key to currency movements at the present time, and the realisation that the Bank of England is unlikely to raise rates in 2015 will have currency players readjusting their positioning.

In their minutes, the Bank said:

"Given the likely persistence of headwinds weighing on the economy, when Bank Rate did begin to rise, it was expected to do so only gradually, and more slowly than in previous cycles.

"Moreover, the persistence of those headwinds, together with the legacy of the financial crisis, meant that Bank Rate was expected to remain below average historical levels for some time to come. The actual path Bank Rate would follow over the next few years was uncertain, and would depend on economic circumstances."

But - the UK Economy Continues to Surge Ahead

Dennis de Jong, managing director at UFX.com, comments on the strong data from the UK economy:

“UK wages have continued on an upward spiral and, combined with low inflation, provide another boost to Britain’s workers.

“The figures will be seized upon by the government as evidence the UK economy is in far better shape than its European counterparts, and indeed other global heavyweights.

The stats at a glance:

• Average Earnings Index +Bonus (Nov): Actual = 1.7% Expected = 1.7%
• Claimant Count Change (Dec): Actual = -29.7K, Expected = -25K.
• Unemployment Rate: Actual = 5.8%, Expected = 5.9%.

As we can see, the cost of living for the UK household is finally starting to improve:

Note that the Bank of England appears unconvinced that pay is rising at a rate that would warrant an interest rate hike:

“Sustained pay growth, at rates materially higher than in recent years, would be required to be consistent with the 2% inflation target in the medium term.”

And this is the crux for the UK currency - until the BoE tell us they are feeling confident it will be difficult for exchange rates to find traction.

Nevertheless, the UK economy is certainly outperforming the Eurozone which could only dream of producing such a performance.

It is for this reason that we are confident that the GBP will remain elevated against the EUR.

The US economy does however continue to perform at a strong rate, and therefore the potential for further downside in GBP/USD remains possible.