To Hike Or Not To Hike, That Is The Question

15 May, 2014

Simon Eastman

Wednesday was all about Mark Carney and the eagerly awaited inflation report. Sterling has, up until now, been the main currency where investors have placed their trust, keeping the pound buoyant as the other main world currencies, the dollar and euro, have struggled to keep pace. The reason for this above all other has been interest rate yield – basically the return on investment for those holding the currency.

For years the US dollar has yielded a near zero percent return as the Fed Reserve cut interest rates to combat the hard times bought on by the subprime mortgage catastrophe which was a major cause in the whole economic crash we are struggling to emerge from. The Eurozone has followed suit, slowly cutting their base rate with recent hints of a further cut, rumoured to be 10 to 15 basis points from its current position. Whereas the Great British Pound has been making leaps and bounds across all majors with the knowledge we are pulling out of bad economic times, growth forecasts are improving all the time and the real possibility of interest rates actually starting to increase as soon as later this year.

Alas, Mark Carney put traders and investors in their place today with his inflation report. Unemployment figures started the day off on the back foot as the claimant count (those claiming job seekers) dropped by 5000 less than forecast for last month, while average earnings also came in well under expectations at 1.7 percent compared to 2.1 percent. Then came the monthly inflation report and the end to sterling’s recent good fortune.

Despite some analysts in the Currency Index camp, among others, predicting just what happened, others were hoping that Mark Carney would reiterate the rumours that with the economy doing well and growth forecasts improving that we may see interest rates increase towards the end of this year but the Bank of England had other views.   Carney is quoted as saying the Bank is in no rush to raise rates and they will “remain low for some time”. Despite the general election next year, which some experts thought would be a key influence in rate increases, Carney was un-wavered in the Banks stance that as we “edged closer” to rates increasing, they would be increased gradually over a long time as low inflation gave the Bank room to consider all aspects of economic growth.

So what did all this mean for the pound? Well the charts looked like the white cliffs of Dover, as the pound plummeted across all major currencies with percent losses against pretty much everything, including the under pressure greenback and more surprisingly the euro, which came under its own selling pressure last week from Mario Draghi at the ECB press conference.

So the upshot is anyone looking to send money abroad in the near term, yesterday was a costly one as the price of any major currency increased dramatically. Those who locked into forward contracts before the report will be breathing a sigh of relief and those who didn’t, should get in touch with one of the brokers at Currency Index today to discuss their requirements for any upcoming transfer abroad.

The rest of the week shows little for the pound to recover with only the low key CB economic index tomorrow for traders to work with for the UK, while Thursday is awash with data for the EU and US. Al the major European economies release their GDP readings along with the EU as a whole, along with EU inflation figures and the ECB monthly report (much like the BoE’s yesterday). Inflation data from the US this afternoon could also give further momentum to the dollar which has found some renewed strength over the past week.

Can the pound fight back or is this the start of a longer term correction for what has been the in favour currency of late? We shall see.