12/11/2014: A dovish Bank of England does not bode well for sterling in the near/medium term

As I talked about earlier in the Morning Report, there has been much volatility in Sterling today. Two key events of the morning have been the UK unemployment data and the Bank of England’s Quarterly Inflation Report. Both have had an impact and meant that there has been a range of over 100 pips in the past few hours.

Unemployment claimant count did not fall quite as much as had been expected and this left the headline rate flat at 6.0%. However the big takeaway from this was that wages are starting to finally pick up. Average earnings have improved to 1.3% (ahead of the 1.1% expected) which is third month of improvement and is back towards levels of early 2014. Sterling took this news as a positive. The chart below shows the actual earnings (in yellow) and the Reuters expectations (in blue), with the actual beating expectations for the past three months now. Wage growth seems to be beginning to finally get some upside traction.

UK av earnings

However, since then Mark Carney has poured cold water on the fire of a potential Sterling rebound with a rather dovish outlook in his press conference which accompanied the Bank of England’s Quarterly Inflation Report. The Bank of England has cut its GDP growth forecast for 2015 from 3.1% (in the August QIR) to 2.9% and for 2016 from 2.8% (in August) to 2.6%. The Bank has also reduced its inflation fans, and is now open to the prospect of inflation falling below 1.0% in the next six months.

This is all rather dovish for the prospect of rate hikes by the Bank of England. Short Sterling Interest Rates futures have been pushed back this morning and the market is increasingly pricing in the prospect of a rate hike into late summer 2015. Carney still sees rate hikes within the forecast horizon, but is now far more vague than he has previously been. He noted that his honest answer to when the UK would hike rates is very different now, to what it would have been 12 months ago. He believes that being our largest trading partner, economic stagnation is a big spectre that is hanging over the Eurozone, and that weaker economic activity in the Eurozone could weigh on the UK.

Subsequently sterling is under pressure again this morning and looks set to test the recent low at $1.5788 and subsequently $1.5750 which is the next support level that can be gleamed from the big 12 month uptrend of July 2013 to July 2014 ($1.4812/$1.7191). There seems to be little that will hold back Cable now for the time being at least.

There is the prospect of some near term respite to the selling pressure this afternoon with Fed member Narayana Kocherlakota giving a speech on monetary policy.  Although he is a habitual stong dove on the committee, he will no longer have voting rights on the FOMC in 2015. Nonetheless, any dovish comments from Kocherlakota could drive a near term Cable rebound. This would though once more be seen as a chance to sell.

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