Pound US Dollar (GBP/USD) Exchange Rate Slips Despite hawkish Comments from BoE Carney

February 21, 2018 - Written by Toni Johnson

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Slips Despite hawkish Comments from BoE Carney

UK Unemployment Unexpectedly Rises, Pound (GBP) Exchange Rates tumble

The Pound US Dollar (GBP/USD) exchange rate slipped on Wednesday, encumbered by a mixed run of UK employment readings and failing to fully capitalise on some hawkish comments from Bank of England (BoE) Governor Mark Carney.

According to figures from the Office for National Statistics (ONS) unemployment in the UK increased to 4.4% over the December quarter, up from the previous period’s 42-year low of 4.3%.

This marked the first time that the UK’s number of unemployed has increased in 2 years – a rather surprising revelation that left Sterling floundering.

It should be stressed, however, that the ONS did point out that the number of people in work continued to increase during this period, rising by 88,000 in conjunction with a 109,000 fall in the number of people defined as ‘economically inactive’.

In this sense the data release was not entirely bad – with many analysts asserting that the figures were merely a blip.

Pantheon Economics’ Samuel Tombs reflected this sentiment, stating:

‘The rise in unemployment looks like a blip, although it will still instil some caution (for the bank’s monetary policy committee)’.

Beyond this, the UK’s wage growth readings (excluding bonuses) increased by 2.5% in the December quarter, beating the forecast of 2.4% and the previous reading of 2.3%.

This is still below the UK’s soaring 3% inflation rate, hence the real wage squeeze on UK households continues, but it should provide some hope for those pricing in a rate hike from the BoE in May.

US Dollar (USD) Exchange Rates Climb Ahead of Fed Minutes

The US Dollar (USD) climbed for its fourth consecutive day today, bolstered by anticipation amongst the markets that the upcoming FOMC meeting minutes will reveal a hawkish sentiment at the US Federal Reserve.

This optimism has largely been due to the growing strength of the US economy, with the US labour market tightening, wage growth slowly accelerating and inflation being above market forecasts leading many to suggest that the US Fed could be pushed to tighten monetary policy as soon as March.

This could mean adjusting their rate hike plans from 3 rate hikes to 4 for this year.

There are, however, some analysts that warn that raising interest rates too quickly could harm, rather than help, the US economy, with many questioning the timing of these hikes on the premise that the economy has to be robust enough to handle the increase in the cost of borrowing.

Nonetheless, judging from the ongoing support for the ‘Greenback’ the market reaction to a hawkish titbit in the minutes will most likely be positive.

In other news various US Markit purchasing managers’ index (PMI) readings were released today, with the composite reading smashing the previous period’s score of 53.8 by rising to 55.9.

This increase was also broad based, with optimism amongst US businesses rising on the back of US President Trump’s latest tax reforms.

GBP/USD Exchange Rate Forecast: Could Sterling Find Support on the UK Growth Readings?

The Pound US Dollar (GBP/USD) exchange rate could find some support tomorrow if the UK’s growth readings beat market expectations, with robust growth liable to spur the BoE even closer towards raising interest rates in May.

Markets have grown increasingly bullish on this possibility today, with BoE Governor Mark Carney’s latest comments in London pointing to an expected 3 rate hikes over the next 3 years, rather than the previous plan of 2.

Chief Economist at the bank, Andy Haldane, also proved hawkish, writing in his annual report to Parliament:

‘I think there is the potential for greater than expected momentum in both global and UK growth and inflation’.

Markets currently expect the UK’s yearly 4th quarter GDP to print at 1.5%, consistent with the previous period, with the quarterly reading expected to follow suit at 0.5%.

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