Losses Predicted for British Pound Sterling (GBP) on Bank of England Growth Forecast Cuts

May 14, 2015 - Written by John Cameron

STORY LINK Losses Predicted for British Pound Sterling (GBP) on Bank of England Growth Forecast Cuts

The Good Lord giveth with one hand and taketh away with the other. If you are a believer in the sentiment of this biblical adage, and you are a holder of Sterling-denominated assets, then today’s session will have galvanised your conviction.

Support for the Pound Sterling (currency:GBP) soared after this morning’s UK labour market data which revealed that the overall level of British joblessness had plunged to its lowest level in seven years during the three months to the end of March. The fall to a nationwide unemployment level of 5.5% did not come as a huge surprise to analysts, but that didn’t stop the Pound recording strong gains against the other major global currencies.

Sterling jumped to a near-term high of 1.4035 GBP EUR against the euro (currency:EUR) and soared to 1.9688 GBP AUD against the Australian Dollar (currency:AUD) in the aftermath of the release as investors factored-in the news that the UK economic recovery is gaining strong momentum. The positive jobs news was re-enforced by figures showing that average pay for employees in the UK, (excluding bonuses), had climbed by a year-on-year 2.2%. This increase on the previous result means that British pay is increasing at its most rapid pace for the best part of four years.

John Hawksworth of leading Chartered Accountancy and Management Consultancy firm PwC was certainly won over; he described the UK economy earlier as ‘an incredible job-creating machine’ and went on to enthuse that, ‘with consumer price inflation stuck at zero, workers are experiencing solid real pay rises for the first time since the recession’.

However, the euphoria surrounding Sterling proved ephemeral. The latest Bank of England Quarterly Inflation Report was published an hour after the go-ahead UK jobs data and it served to reverse almost all of the Pound’s early morning gains. The main headline-grabber from the missive saw the Old Lady of Threadneedle Street drastically cut its GDP growth forecast for the domestic economy over one, two and three years. The cut from an annualised 2.9% to a year-on-year 2.5% for 2015 came as the biggest blow, thanks to the short-term nature of most investors’ thinking. Analysts forecast that this may hold back Sterling against the other major global tenders moving forward.

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