This may be viewed as a double whammy hitting the UK economy, where living costs seem set to
rise and members of the public are earning less. Even if the consumer price
index released for the
UK comes in at 1.8 percent
this week, down from the previous reading of 1.9 percent, this situation will still stand. Carney
also highlighted the importance of a weaker sterling with regard to the need to increase
Despite the recent fall in unemployment and low levels of inflation reported in the UK this year, wage growth remains stubbornly low.
The situation now appears far different. At the time of Carney’s speech at Mansion House on June 12th, GBP/USD
was rising on close to 1.7000 and broke through that level shortly afterwards.
The speech gave the firmest indication that interest rates would rise sooner than many investors expected and there was a positive reaction in markets. Many were now certain that a
rise in rates to 0.5 percent
would now occur before the end of the year.
Carney spoke of the need for markets
to react to what had been a very decent run of good UK data. He also quelled suggestions of an informal
pact between the BoE and the Chancellor
of the Exchequer’s office to maintain rates at their low levels until after the general
election in May 2015.
There seems to be a divergence of opinions within the BoE’s Monetary Policy Committee regarding
the timing of this base interest rate hike, and this may be revealed when the
minutes from the latest meeting are released on Wednesday morning. Previously,
there was a stance linking
a rise in this rate to the unemployment rate.
Now it seems that wage growth is
a far more influential factor. As the market backtracked on its previous view
last week, Carney sought to resurrect this view in an interview featured in The Sunday Times published over the weekend. He mentioned that wage growth need
not be above inflation, but a strong view from the BoE that this measure was stable and rising would be enough to result in an interest rate
GBP/USD rose from the open on Monday morning as a result, but this
uncertainty is ultimately not helping sterling. One
must be reminded that the UK economy still seems strong, with the central bank forecasting gross domestic product of 3.5 percent this year. Despite this, and with the added geopolitical tensions
from the Middle East
and Eastern Europe also weighing on sterling, it is clear that the average citizen may
begin to find their wallets and purses lighter.
What this means for traders
Chances of a rate hike have therefore receded
considerably since Carney’s speech at Mansion House. What has become
evident since that speech, is that there may well be discrepancies evident
within the BoE.
Indecision and confusion are seemingly clear, and the BoE will need to maintain a firmer and more
assured stance if it intends to retain credibility and ensure that GBP/USD
continues in its steadiness.
How will sterling trade against the US dollar? Trade GBPUSD as spot, forward and as an option today.
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