Despite the stronger than expected U.K. jobs data, the pound had a pretty nasty fall in recent trading. What’s pushing the U.K. currency lower?
1. Economic slack and slow wage growth
As I’ve mentioned in my trading guide the U.K. jobs release, market participants are likely to pay closer attention to the average earnings data more than the headline figures. While the employment report showed a 33.6K drop in claimants and a jobless rate improvement from 6.5% to 6.4%, pound traders zoomed in on the 0.2% decline in wages, which was worse than the estimated 0.1% dip.
According to the Office of National Statistics, this marks the first time that average hourly earnings showed a negative reading since the aftermath of the financial crisis around May 2009. The lack of wage growth is a huge concern as price levels keep rising, prompting many to worry about a downturn in spending later on. Heck, the U.K. Labour Party has dubbed this as a “cost of living crisis” already!
2. Dovish remarks from Carney
As expected, BOE Governor Carney highlighted the lack of wage growth in his latest testimony, citing that there’s a considerable amount of economic slack to be absorbed. Recall that the formerly hawkish BOE head has already backpedaled on his tightening predictions for this year, and he appears intent to extend his stay in the dovish camp.
“Pay growth has been remarkably weak, even as unemployment has fallen rapidly,” Carney admitted. He even added a fresh list of concerns, as he cited intensifying geopolitical risks and structural adjustment in the euro zone.
3. Downgraded BOE estimates
With that, it’s no surprise that BOE officials downgraded their wage growth forecasts from 2.5% to 1.25%. Yep, they cut their estimate in half!
As for economic growth, the central bank also revised their Q3 2014 GDP predictions lower. From an initial estimate of 0.9%, the quarterly GDP is now expected to show a 0.7% expansion. The good news though is that they made a small upgrade for their annualized GDP from 3.4% to 3.5%.
When it comes to inflation, BOE policymakers reiterated that the annual CPI could remain below its 2% target for the foreseeable future, as they predict that the absorption of economic slack could keep price pressures at bay.
4. No more tightening expectations for the year?
So much for expecting the BOE to hike rates before the end of 2014! Weak wage growth and a downbeat BOE inflation report were enough to dash hopes of seeing the British central bank tighten sooner rather than later. “We will continue to monitor a broad range of data to assess overall inflationary pressures and the timing of the first increase in bank rate,” Carney pointed out.
“Even if spare capacity were to be eliminated at a stroke overnight, the appropriate level of the bank rate would not be far from where it is today,” he added. Any guesses on when the BOE might increase interest rates? Share your thoughts in our comment box or vote in our poll below!