UK Growth Downgraded by Bank of England

14 May, 2015

Rob Bastin

Yesterday was a data packed day of trading with key releases for the major currencies. The day kicked off with German growth figures which were down to 1.1% on the year from 1.6% previously, and this contributed to a weak Euro-zone GDP figure of 1% annual growth, shy of the 1.1% forecasts. These figures did little to change the value of the Euro however announcements from the UK were to cause high levels of volatility throughout the morning.

UK unemployment figures impressed again with the headline rate coming down further from 5.6% to 5.5%, a seven year low, and with average earnings improving further from 1.9% to 2.2%, exceeding analysts’ predictions. This news boosted sterling across the board and in particular GBP/EUR once again tested the 1.40 ceiling. Unfortunately these gains were extremely short lived as just 1 hour later the Bank of England delivered the latest quarterly inflation report, in which 2015 growth forecasts for the UK were downgraded from 2.9% to 2.5%. The pound very quickly wiped out all of its previous gains from the unemployment figures as Mark Carney continued to deliver an honest report containing a number of concerns.

The Bank of England expect deflation to emerge sometime this year although remain confident that this will return to the 2% target within 2 years. Any period of zero inflation is expected to be short lived but is likely to contribute towards a delay in interest rate hikes which are now unlikely to happen any time before Spring 2016. Another factor hindering both growth and potential rate changes is the strong value of Sterling at present. Exports are being affected due to an increase is cost to overseas buyers and this is subsequently slowing overall growth in the UK. The Bank of England are reluctant to worsen this situation by increasing interest rates as this would only strengthen the pound even further. All this points towards short term sterling weakness and GBP/EUR was the biggest loser of the day dropping 2 cents from its morning peak and again failing to breach the 1.40 ceiling.

The Euro’s continued surge was aided again yesterday afternoon by further weak US data as Retail Sales figures for April dropped sharply to 0.1% in April from 0.7% in March and missed forecasts of 0.5% by some way. The weak dollar typically lends to a stronger Euro which continues to restrict further gains for GBP/EUR exchange rates. GBP/USD was also able to recover to a 5 month high in the afternoon following this release.

After a manic day of data yesterday, today offers no major releases to look out for so instead exchange rates are likely to be driven by the yesterday’s events with the pound in a far more fragile positions that it has been since the election last week.