Will Wednesday’s release of the UK employment/earnings figures and Bank of England’s quarterly inflation report send sterling to fresh multi-month lows, or will traders exploit any bounce for further sell-off? Are things that bad for the currency?
The August release of the inflation report was dominated by rising spare capacity and negative earnings growth, shifting the focus from tightening labour markets and BoE rate hike expectations to low pay. This forced bond traders to delay their forecasts for the first BOE tightening to Q3 2015 from an earlier Q1-Q2 2015. Today, According to Sterling Overnight Index Average Sonia fixings of UK base rates, the BoE is unlikely to deliver its first full 25-basis-point rate hike until Q4 2015, which is well after the consensus of Q1-Q2 2015, prevailing at the August meeting. UK inflation can officially be described as being “persistently undershooting” market expectations, forcing markets to further push BoE rate hikes forward.
The prolonged array of downside data surprises seen in the UK recently has also dragged on both sterling and gilt yields. Since the beginning of October, all major UK data series have deteriorated, or surprised on the downside (or both), with the exception of the ILO measure of August unemployment falling to 6.0% from 6.2%.
Beware of jobs-report impact
On August 13, 2014, GBP sustained a one-two punch following the unexpected contraction in June earnings growth, showing the first contraction in in five years, followed one hour later by the inflation report and Carney conference focusing on elevated spare capacity, negative wages growth–both serving to dampen any inflationary effects from plunging jobless rate, unleashing aggressive selling in sterling.
Different this time?
The 9:30 am release of the October jobless claims and September earnings and unemployment rate could well deliver a short-lived bounce in the pound if earnings and earnings-ex bonuses maintain the 0.7% and 0.9% shown in September respectively and ILO unemployment falls below 6.0%. We shouldn’t forget the jobless claimant count, which could rein in any GBP bounce if the decline is not greater than 20,000.
One hour later, the BoE report and the ensuing Carney testimony will likely resort to the usual factors on spare capacity and low pay growth to explain the nine consecutive monthly inflation figures below the BoE’s 2.0% target and to make the case for further sub-target CPI. Against this backdrop, GBP/USD has little scope for posting any material advances above $1.6200. Aside from low inflation and weak wage growth, Carney could also highlight the broadening signs of slowing expansion in manufacturing, services, construction as well as the rapid declines across energy commodities.
And the fact that we did not mention in this piece the deteriorating bipartisan landscape in Westminster with regards to the EU, suggests attacking the rebounds in GBP crosses remains the preferred strategy.
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