The Pound strengthened against all of its major currency peers yesterday as markets continued to look favourably on the UK currency following Wednesday’s hawkish Quarterly Inflation report from the Bank of England.
The BoE now expects the UK Unemployment Rate to hit the 7.0% threshold in the final quarter of 2015 – one year earlier than it initially predicted during the summer when it unveiled its forward guidance policy. The Bank intends to keep interest rates at the current record low of 0.50% until Unemployment falls to 7.0% – as long as inflation remains on-target – and this means that the health of the British labour market is now vital to the strength of the UK currency.
Although the BoE has repeatedly stated that the 7.0% target is a marker and not a trigger, it is widely expected that rates will be raised when, or soon after, the labour market reaches that level. With interest rates now likely to rise around the turn of the year 2015/16, speculative investors are buying into Sterling in anticipation of higher yields on UK gilts.
The Pound improved by half a cent against the Euro, half a cent against the US Dollar, a whole cent against the Canadian Dollar, a whole cent against the Australian Dollar and a whopping one-and-a-half cents against the New Zealand Dollar yesterday. This even as UK Retail Sales came in worse-than-expected at -0.7% for October.
Janet Yellen Confirmation Hearing
Sterling remained resilient against the US Dollar as demand for the ‘Greenback’ was impacted by comments from soon-to-be Federal Reserve President Janet Yellen. Yellen has always been one to side with loose monetary policy and her comments to the Senate yesterday indicated that she intends to maintain the Fed’s QE3 scheme for a while longer, to help spur lending, boost employment and support US economic growth.
Stressing that bringing down the Unemployment Rate is “imperative” to the future of the US economy, Yellen said that the positives currently outweigh the negatives of the Fed’s $85 billion a month asset purchasing programme. This weakened demand for the US Dollar.
At 1.6080, GBP/USD looks to be building momentum for another rally towards 1.6260, and then possibly 1.6300. However, Yellen’s dovish stance will only count for one vote at the Fed’s next policy meeting in December, meaning that the QE3 taper could begin before she takes her place at the helm of the world’s most influential Central Bank in the New Year.
With US GDP printing positively at 2.8% in Q3 and Non-farm Payrolls coming in robustly at 204,000 in October – whilst the government shutdown was in full effect – it is still entirely possible that Fed officials will vote for a small tapering of asset purchases next month, and this could halt Sterling advances against the US Dollar, for now.
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