Sterling punished by the BoE's tone - BTMU

By FXstreet.com | August 14, 2014 AAA

FXStreet (Barcelona) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ, assessed the recent release of the BoE's QIR.

Key Quotes

"BoE’s QIR to further dampen pound upward momentum The pound has remained at weaker levels after weakening following the release yesterday of the less hawkish than expected BoE Quarterly Inflation Report The report prompted the market to push back expectations for the first BoE rate hike until at least February 2015, with the risks shifting as well to a later rather than earlier rate hike. Rate hike expectations have shifted back to roughly where they were during the first five months of 2014 prior to Governor Carney’s Mansion House speech in June. As a result GBP/USD has also fallen back towards its average during the first five months of the year at around 1.6650."

"The QIR revealed that the BoE is continuing to move closer to raising rates as the estimated amount of spare capacity has declined further to 1.0% of GDP although there is wide range of views on the MPC. The BoE also recognised that spare capacity is being used up more quickly, and is expected to continue to do so which resulted in material downward revisions to their unemployment rate forecasts."

"However, the BoE also judged that there has been a larger positive labour market supply shock which is helping to dampen wage growth and is expected to continue to do so at lower levels of unemployment. Their estimated natural rate of unemployment was lowered to 5.5%. As a result their inflation forecasts remained largely unchanged despite expectations for a materially lower unemployment rate."

"BoE Governor Carney also stressed the importance of wage and unit labour costs growth in determining the timing of rate hikes ahead. The BoE materially lowered its forecast for wage growth in 2014 by 1.25 point to 1.25% but still expects an acceleration to 3.25% in 2015. If wage growth continues to disappoint it would likely push back expectations for the first rate hike later into 2015."

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