FXStreet (Edinburgh) - Senior Currency Strategist at Rabobank Jane Foley assessed the ongoing sell-off in the sterling, accelerated this week after the BoE’s Quarterly Inflation Report.
“Two months ago, a fairly flippant remark in Carney’s Mansion House speech that a rate hike “could come sooner than markets currently expect” send a shock wave through the market. This remark distracted investors from the body of this speech in which the Governor noted that there was still scope for excess capacity to be used up before the BoE hike rates and that “pay pressures and unit labour cost growth has remained subdued”.
“If there is was one take-away from the Inflation Report this week is that there is no real pressure on the BoE to hike rates until wages push higher”.
“The lack of wage inflation has surprised most economists this year and, in light of the fairly rapid drop in the unemployment rate, no doubt there will be some forecasters expecting wage growth to accelerate in the near–term. In fact the minutes of the July policy meeting concede that “some survey indicators of wage growth has already picked up materially”.
“This week’s hurried changes in the market’s collective view of when the BoE will first hike rates has clearly undermined the pound’s position vs. all other major currencies”.
“However, the dovish position of the BoE has been given further perspective by the poor data releases from other economies”.
“Carney this week repeated the warning that when rates do start to rise that these will be “gradual and limited” to ensure that the economy continues to be nurtured”.
“The market may have this week re-calibrated its expectation of the first BoE rate hike, but the Bank is still likely to be the second major central bank to hike rates after the RBNZ”.
“For this reason we still expect that further upside correction in EUR/GBP will run out of steam and that EUR/GBP will trend towards 0.77 medium-term”.