US Productivity Slumps Sending Sterling-Dollar Higher

The dollar exchange rate complex (USD) has come under significant pressure on fresh signs that US economic growth is starting to lose momentum.

A much-watched indicator concerning the productivity of US workers showed productivity fell significantly in Q4 of 2014.

The decline in productivity came as the rate of employment growth in the non-farm private sector slowed at the same time unit labor costs rose further.

Productivity fell 1.8% saar in Q4, significantly below consensus expectations for a decline of 0.1%.

The decline saw the British pound advance significantly against its US peer taking it back above the 1.52 level.

The dollar is meanwhile softer against the euro having reached 1.1429.

Currency Markets Warned of Over-Reaction

The news comes as Initial Jobless Claims data actually beat expectations by coming in at 278K.

According to Blerina Uruçi at Barclays there is the danger that markets are over-reacting to the data:

“This was a soft report, on balance. Subdued productivity growth and the fact that the overall compensation bill for companies is rising faster relative to output may limit the ability of wages to rebound strongly.

“Nevertheless, we would caution against over-interpreting one month’s data, as these series are prone to significant revisions from quarter to quarter.”

Bank of England Leaves Rates Unchanged

Meanwhile, the UK central bank opted to keep interest rates unchanged in what was a widely expected decision.

Dennis de Jong, managing director at UFX.com tells us:

“Unsurprisingly, the Bank of England kept interest rates at a record low and, after 70 months without change, many expect rates not to rise until next year.

“There are clear signs the UK economy is growing, although it remains in a somewhat precarious position amidst an unstable global outlook. And if UK inflation continues at just 0.5% then the consensus on a rise is likely to happen.”

It does however now appear that simply doing nothing is a positive for the British pound as other global central banks rush to cut interest rates.

The PBoC cut the RRR by 50bp to 19.5%.

The move came a little earlier than we expected, but is consistent with our view of further easing this year.

Barclays tell us they now look for a total of three RRR cuts in 2015 and two interest rate cuts in Q1 and Q2.

The central bank of Romania cut its main policy rate 25bp.

Markets do see at least one more 25bp rate cut is likely, more if inflation stays close to zero.

The National Bank of Poland signalled that it will be ready to cut rates at its March MPC meeting. Barclays expect a 50bp cut in March.