The Pound plummeted versus all of its major currency peers yesterday in reaction to a dovish set of remarks from Bank of England Governor Mark Carney in his latest quarterly inflation report.
In an attempt to cool rate hike speculation the Governor hinted that recent improvements in private sector output and the labour market were not likely to persuade the bank to start raising rates ahead of its scheduled date in the second quarter of next year:
“Although the margin of spare capacity has probably narrowed a little…the Monetary Policy Committee continues to judge that there remains scope to make greater inroads into slack before raising the bank rate.”
Sterling had initially received a bit of a boost yesterday morning when it was announced that the British unemployment rate had fallen to a fresh 5-year low of 6.8% in March. It was also reported that 283,000 people found work in March, bringing the workforce up to an all-time record high of 30.43 million.
However, Carney’s comments on the still-present levels of slack in the labour market eradicated the positive sentiment triggered by the employment data. It seems that policymakers are still concerned with the number of people becoming self-employed. The MPC views this as a sign that the declining jobless rate could be overstating the recent improvements in the jobs market.
The bank still expects growth of 3.4% this year, which would most likely make the British economy the star performer of 2014, but it does not see the consumer price index rising back to the 2.0% target until after 2016.
Investors had begun betting on interest rates being raised as early as Q4 this year, but in light of yesterday’s dovish rhetoric it seems that traders may have to wait until the Q2 2015 for the BoE to start its hiking cycle.
Sterling sunk to a series of monthly lows against the majors as a consequence of this drop in sentiment.
However, as we look to the future it is difficult to see the ongoing improvements in the UK economy not having a positive impact on demand for Sterling. Despite Carney’s latest protestations the BoE may still be persuaded to start hiking this year if data continues to impress.
PMI reports for manufacturing, construction and – most importantly – services have not just impressed with their sturdy output and expectations figures, they have also shown that companies are now hiring at the fastest pace for many years.
If optimism continues to snowball as it has done in recent months then it is entirely likely that the Pound will recover from the drop in demand this week, as the slack in the labour market is slowly but surely erased.
The Pound to Euro exchange rate (GBP/EUR) is still within touching distance of yearly highs at 1.23 and the Pound to US Dollar exchange rate (GBP/USD) could easily rally back towards longstanding resistance at 1.70 if figures related to the UK jobs market maintain an upbeat trajectory.
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