The major risk for the Bank of England (BoE) Inflation Report was always going to be how hard Governor Carney would decide to punch the pound. Although he managed to hold himself back from a complete knock-out, he did achieve a 90 pip body blow to the GBPUSD. The Cable fell as low as 1.5849 following the BoE’s report, which not only downgraded economic growth forecasts for 2015, but also announced that inflation is set to fall below an annualised 1% within the next six months. The BoE citied Eurozone weakness as one of the reasons behind the economic downgrade and, judging by Carney’s tone today, it remains an outside chance, at best, that the BoE will look to raise interest rates before the UK election in May 2015.
Prior to the release of the BoE Inflation Report, Sterling bulls pushed the Cable to 1.5940 after learning that Average Wages in October outgrew UK inflation for the first time in five years. This raised anticipation that the BoE might look to normalise monetary policy next Spring, as previously hinted. However, judging by Carney’s reaction to questions posed to him following the release of the report today, this is not the case. Carney indicated this improved wage growth would have no impact on rate rises, which will remain “gradual and limited”. Carney also stated that wages outgrowing inflation was expected for a normal economy.
Although GBP bulls will be optimistic, the improved Average Wage data will weaken some of the Monetary Policy Committee’s (MPC) strong views on weak price pressures, we still overall appear to be some way from a third member of the MPC joining the two existing dissenters.
In regards to what happens next for the Cable, I would expect investors’ appetite towards the GBP to remain distant for some time. Any potential upside moves for the pair will also be correlated to US Dollar profit-taking, like we saw at the beginning of the week. If Friday’s EU GDP data does indicate the EU economy has taken another turn for the worst, we’re looking at the pair meeting the current yearly low (1.5790).
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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