Earlier this week, I wrote about the major market catalysts for the pound that you should watch closely. In case you weren’t able to do so, here’s a quick rundown of how the events turned out and what these could mean for GBP/USD’s longer-term forex price action.
1. Downgraded BOE inflation forecasts
BOE officials announced lower inflation estimates for this year and the next, cutting their 2014 annual CPI forecast from 1.9% to 1.2% and their 2015 projection from 1.7% to 1.4%. They even added that there’s a pretty strong chance that inflation would fall below 1% within the next six months!
Falling commodity prices and resurfacing geopolitical risks were the main culprits for these downgrades, as the U.K. inflation rate has been treading below the BOE’s 2% target for the past nine months.
2. Concerns about a euro zone recession
Policymakers also decided to downgrade growth forecasts, slashing their 2015 GDP estimate from 3.1% to 2.9% and their 2016 GDP projection from 2.8% to 2.6%. BOE Governor Carney explained that downside risks to the global economy are starting to materialize, highlighting the negative impact of a potential euro zone recession to the U.K. economy.
Carney noted that they are already seeing a decline in demand for U.K. exports and experiencing disinflationary effects from imported goods – both of which are effects of the ongoing euro zone slump. Although Carney commended ECB Governor Draghi for putting the necessary stimulus measures in place, he still maintained a downbeat outlook for the euro zone economy and lowered exports estimates from a 2.25% gain to a 1% decline for the year.
3. Weakening labor market trends
With external risks already building up, it doesn’t help that domestic demand seems to be facing a potential downturn as well. The latest jobs report failed to impress, as the U.K. chalked up back-to-back months of lower than expected hiring gains.
The October claimant count change showed a 20.4K increase in employment, weaker than the projected 24.9K rise. Analysts had expected to see the jobless rate improve from 6.0% to 5.9% but were disappointed to find out that it stayed unchanged.
On a brighter note, the average earnings index marked a stronger than expected 1.0% gain for the past three months, indicating that wage inflation is starting to pick up. For now though, wage growth is still lagging far behind the country’s overall inflation rate, which means that it will take some time before hiring gains translate to stronger spending and economic growth.
4. No BOE rate hikes anytime soon
With that, it’s no surprise that Carney confirmed that market participants were right to delay rate hike expectations for the BOE. “It is appropriate that, while a tightening in monetary policy remains in prospect, markets now expect somewhat easier monetary conditions over the forecast period than was the case three months ago,” he pointed out in yesterday’s press conference.
Bear in mind that BOE rate hike expectations for early 2015 have mostly been responsible for keeping the pound afloat in the past few months. Removing this possibility is just like pulling the rug from under the pound’s feet, and this usually leads to a nasty tumble!
5. Fed still on track to tighten next year?
In contrast to the BOE switching to a more dovish bias, the Fed has recently reiterated it could stay on track to tighten monetary policy next year. While the October U.S. NFP reading also fell short of expectations, underlying labor figures reflected sustained improvements and a promising pickup in hiring.
As you’ve learned in our School of Pipsology lesson on Fundamental Analysis, monetary policy biases are a major driver of forex price action, as central bank tightening expectations typically spur currency appreciation. Should economic data continue to support the idea of a Fed rate hike and a delay in BOE tightening, GBP/USD could have significant room to fall in the coming months.
Where do you see GBP/USD trading by the end of this year? Vote in our poll below or share your thoughts in our comments section!