Did the pound get heavier or what?! The British currency chalked up significant losses to its forex counterparts in the past few days and may continue to fall further due to these factors:
1. Record-low U.K. inflation figures
Earlier this week, the U.K. churned out weaker than expected inflation readings, with the headline CPI falling from 1.5% to 1.2% in September. That’s its lowest level since 2009!
Falling oil prices were mostly to blame for the downturn in price pressures, along with the recent pound appreciation, which weighed on import prices. Core inflation, which excludes prices of volatile items, tumbled from 1.9% to its five-year low of 1.5% and further away from the BOE’s annual inflation target of 2%.
BOE officials might have second thoughts about hiking interest rates next year, as this tightening move might push the pound higher and drag price levels lower.
2. Downside surprise in jobs data
Looks like the U.K. labor market’s happy days are over! After four consecutive months of better than expected results, the claimant count change fell short of expectations for September. Analysts were expecting to see a 34.2K increase in employment but were disappointed to see a mere 16.8K gain. To top it off, the previous month’s reading was downgraded from a 37.2K increase in hiring to just 33.2K.
On a brighter note, the jobless rate still managed to fall from 6.2% to 6.0% in the same month, as the total number of unemployed people fell below 2 million for the first time since 2008. Aside from that, signs of wage growth were seen, as average earnings for the past three months picked up by 0.7%.
3. Less hawkish BOE stance?
Although domestic data indicates that the U.K. economy could hold well on its own, external factors suggest otherwise. As BOE officials noted in their October policy statement, the looming possibility of a euro zone recession could wind up hurting U.K. growth. After all, the euro zone is the country’s biggest trade partner.
Majority of the policymakers are unimpressed by the latest improvements in the U.K. economy, and it doesn’t help that inflation and employment seem to have hit a road bump. Next week’s release of the BOE meeting minutes should provide more clues on whether or not the MPC is shifting to a less hawkish monetary policy stance and dictate the pound’s longer-term forex direction.