Article by ForexTime
Following the previously volatile European trading session, where a terrible German ZEW survey and weaker than expected UK CPI encouraged discussions to heighten that low inflation levels are becoming a global trend, Wednesday has been slightly quieter so far. The major noticeable mover has been the Cable, with the GBPUSD slowly moving back into the low 1.59s after a better than forecast UK employment report. The unemployment rate was announced at 6%, its lowest since 2008 but it remains unclear how long the small progression the GBPUSD has noticed today (40 pips) can be maintained.
To be honest, the GBPUSD is generally struggling to find any direction at present with the pair continuing to alternate between bullish and bearish movement. Apart from the unemployment rate declining, there was nothing else in the employment report to get the GBP bulls excited. The unemployment rate may have declined, but yesterday’s inflation data showed UK CPI is also at an unexpected 5-year low. Average Wage Growth increased last month by 0.7% but when CPI in its own right is 1.2% – there is no real pressure on the BoE to raise interest rates. As long as this afternoon’s US Advance Retail Sales continues to suggest the US economy is performing with consistency, I can see the pair slipping straight back to 1.58.
Although we already know two members of the Monetary Policy Committee (MPC) have voted for a UK rate rise, you’ve got to believe another member of the MPC has voted for a rate hike to be a GBP hawk right now. The downside risk is that the two dissenters might actually look at the recent unexpected decline in UK CPI alongside signals UK Manufacturing growth is being compromised by EU economic weakness, and sway back to voting against the BoE raising rates. This really would awake the bears.
Either way, until we see wage inflation rise and general CPI pressures moving back towards the BoE’s threshold 2% target – talk regarding a BoE rate hike is going to slide into the background. Governor Carney has previously implied that we can expect a UK rate rise around Spring 2015 and I believe we are still on track for this. It would require a continuation of below expected data for the BoE to delay a timeframe to raise rates, but investors are more than aware that global economic activity is questionable right now. Therefore, they will not be attracted to pricing in a move that could still be four to five months away, especially if there is a possibility that the rate rise might be delayed.
On a concluding note, it’s bizarre to think that we have transitioned all the way from the GBPUSD reaching the 1.71 dizzy highs and optimists pricing in 2014 rate hikes from the BoE in August, to a near full retracement of the past year’s gains by mid-October.
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Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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