GBP Hit by BoE and Wage Data, GBPUSD Gives us Previous Gains

The British pound (GBP) remains under pressure following confirmation the UK will not face interest rate rises any time soon.

• “We would look to buy GBPUSD dips back to 1.4645, looking for a potential post Fed spike towards 1.4900.” - Jeremy Stretch at CIBC.

• “The MPC’s added focus on Sterling appreciation and its impact on inflation levels and expectations is a sign of their reticence to do anything in the immediate term." - Enrique Diaz, Chief Risk Officer at Ebury.

The pound to euro exchange rate (GBPEUR) slumped 0.71 pct following mid-week data bringing to a dramatic end what has been a strong period of gains. We look to be on course for the first weekly decline in sterling euro in seven weeks.

Indeed, this will be only the second week in 2015 in which the pound has ended in a worse position.

The rate is now quoted at 1.3949 - the currency pair entered the week above the 1.40 threshold.

The pound to dollar exchange rate rocketed mid-week on relief-buying in the wake of the FOMC event which was a negative for the USD. 

The pair breached 1.51 at one stage but has since given all gains back in some of the most volatile trading conditions we have seen in years.

The Australian, Canadian and New Zealand dollars are all half a percent stronger against the UK unit.

Please note, that all levels mentioned here refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more.

Why is the British Pound Weak?

The dramatic declines come courtesy of interest rate expectations which remain the dominant driving force of global currency valuations.

The difference in interest rate levels between various countries ultimately determines the flow of significant amounts of investor money.

It would seem that money is being shipped out of Sterling as investors realise they will not be getting the returns on that cash that they were initially hoping for.

Sparking the sell-off was the Bank of England who issued the minutes from their March policy meeting.

Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX says an interest rate raise in 2015 is now unlikely:

“Today’s employment data and Bank of England minutes sent the pound tumbling against the dollar and the euro as they reconfirmed that U.K. rate rises remain some way off into the future.

“With average earnings slowing from 2.1% to 1.8% and the Bank of England highlighting the potential impact on inflation of the stronger pound, it seems highly unlikely that there will be any rate hikes this year.”

The British pound did not like news that the rate of pay increase for the UK labour force had fallen.

We had been arguing that the economy was starting to run low of spare capacity and would have expected wages to be picking up pace. This surprise is obviously being shared with the markets. 

The same data release in February sparked a strong GBP rally, not so this time around.

Unemployment continues to decline with 31 thousand people finding jobs, more than the 30 thousand pencilled in by market analysts.

The rate of unemployment remains at 5.7%.

Enrique Diaz, Chief Risk Officer at Ebury says he expects the first interest rate rise to happen in Q1 of 2016:

“The MPC’s added focus on Sterling appreciation and its impact on inflation levels and expectations is a sign of their reticence to do anything in the immediate term. As a consequence, the Pound fell immediately 0.7% against the euro and slightly less against the dollar – a significant change to occur so quickly.

“This is good news for British exporters who have been struggling with Sterling’s strength against the euro.”

The declines against the euro are more exaggerated owing to the strong period of trade seen by GBPEUR over recent weeks.

The market had become increasingly bullish on further sterling gains and the second a set-back occurs we see this cascading effect whereby traders are forced to sell sterling as they are closed out of their positions.

We could see losses stabilise only when the overbought conditions are brought to an end.

For the pound dollar exchange rate progress will now be decided by the Federal Reserve this evening to see whether the weaker economic data and stronger dollar will lead them to signal a delayed timeframe for the first rate hike which is expected in June.

Buy the Dip in Pound Dollar Exchange Rate

Jeremy Stretch at CIBC is one analyst who things the current sell-off in sterling dollar is now reaching completion.

In a note to clients following the release of the Bank of England minutes Stretch says:

“However, despite the disappointing earnings we continue to favour GDP of around 0.6% in Q1, an outturn which remains above trend.

“Thus while the BoE may currently remain unanimous as regards monetary policy inertia, the MPC vote remained 9-0 for no change this month, we would look to buy GBP USD dips back to 1.4645, looking for a potential post Fed spike towards 1.4900. EUR GBP rallies up to 0.7245/55 should be sold into.”

Economic Outlook Remains Positive

Despite the sell-off in sterling the economic outlook remains firm.

Commenting on the news that the number of people out of work fell by 102,000 to 1.86 million in the three months to January, John Allan, FSB National Chairman, said:

“Today's employment figures are an encouraging sign that the optimism of last year is being carried forward, with our recent survey work showing robust hiring intentions from small businesses.

“We are also beginning to see modest gains in productivity among small firms, which should allow them to take on more staff in the future. Continued low inflation has created a stable environment in which businesses can expand.”

“Today's figures on pay, which show an increase of 1.6 per cent excluding bonuses compared to a year ago, are also a cause for optimism. Our members have told us that they expect average staff pay to increase by 1.8 per cent over the next 12 months, which should mean further positive momentum on wages going into the second quarter.”