Sterling drop continues on Carneys comments

14 August, 2014

Rob Bastin

Regular readers will be aware the pound has recently begun a negative correction following such a strong rally in the last 6 months. These turn in fortunes leaves the pound very far more vulnerable to selling and this was demonstrated in yesterday’s trading as the pound dropped 1% from its high of the day. The selling begun after the release of the latest UK unemployment figures which at first glance were very encouraging with the headline rate dropping from 6.5% to 6.4% and the claimant count figure also improved and better than expected. After an initial flurry the markets soon focussed in on the more concerning figures with a slowdown in growth of average earnings, coming in at 0.6% against a 0.7% forecast.

Just an hour later the Bank of England began their quarterly inflation report and were quick to back up the markets’ concerns over wage growth, stating that they have halved their growth forecast for average wages with expectations of just a 1.25% growth this year. Yesterday’s figures showed the slowest growth pace since records began in 2001, and Mark Carney was keen to point out that this will be a strong consideration in the planning of interest hikes so as to not cripple many households with higher borrowing costs. Carney maintained that any interest rate will be limited and accommodative. These comments have firmly put off any expectation of interest rate hikes until at least Q1 of 2015, and subsequently the pound is under further pressure.

GBP/USD hit a 2 month low despite weak Retail Sales figures out for the USA. Growth of 0.2% had been forecast however actual figure were completely flat. Despite this the pounds weakness drove exchange rates lower and will likely continue to do so over coming weeks with the upward trend unlikely to resume to until later in the year.

Today’s calendar is Euro focussed with no key data out for the UK. The ECB monthly report will be released at 9am with Consumer Price Index and GDP figures all to be announced at 10am. The Euro is currently poised for a rally off any positive data against the pound and US Dollar. For further insight into the bumpy road ahead, contact your broker today to discuss any imminent transfer requirements.