The Pound to Australian Dollar exchange rate (GBP/AUD) grew by around 1.7 cents earlier this morning as markets reacted acerbically towards the ‘Aussie’ following the release of January’s terrible Unemployment report.
Compared to estimates of a +15,000 gain, the Australian labour market contracted by -3,700, which took the headline Unemployment Rate up from 5.8% to 6.0%.
The weaker-than-anticipated figure damaged demand for the Australian Dollar because it was seen to make it slightly more likely that the Reserve Bank of Australia could look to cut rates again – despite recent RBA comments suggesting it won’t. The soft score certainly suggests that rates will remain at the current record low of 2.50% for a prolonged period of time.
During yesterday’s session Sterling surged higher across the board, including a rally of over two cents against the Australian Dollar, in reaction to the Bank of England’s latest Quarterly Inflation report.
Governor Mark Carney announced that the Monetary Policy Committee had decided to modify its forward guidance policy. Forward guidance Mk II stipulates that the Bank will not raise interest rates until the spare capacity of the UK economy has been absorbed. The BoE will monitor a broad range of indicators to determine when this happens – current projections point to a date in the second quarter of 2015.
However, it is notoriously difficult to measure spare capacity; for example forecasts from the Treasury differ in estimates ranging from just 0.8% all the way up to 6%. The BoE currently estimates spare capacity to be somewhere between 1% and 1.5% but even this depends on three things: the economy keeping up its current rate of growth, the damage caused by the recession not turning out to be greater than currently estimated and productivity continuing to improve at the same pace it is now.
The BoE also upgraded its growth projections for the UK economy this year from 2.8% to 3.4%.
In addition to a 3.7 cent accumulative gain against the ‘Aussie’ Dollar, the Pound rose by 1.7 cents against the US Dollar, 2.8 cents against the New Zealand Dollar, 1.2 cents against the Canadian Dollar and 1.5 cents against the Euro yesterday.
Money market rates have pointed to a rise in the UK benchmark interest rate around the turning of the year 2014/15 for some time now, however, the official line from the Bank of England, prior to yesterday’s QI report, was that rates would not be raised until 2016.
In response to the official admission that last August’s projections vastly underestimated the strength of the British economy, and an explicit nod to a first rate hike in Q2 2015, investors sent Sterling higher across the board.
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