UK Employment Data and Bank of England Minutes Paint a Prettier Picture of UK Economy

The British pound recovered lost ground against the euro and spiked higher against a host of currencies today after the minutes from the new Governor of the Bank of England’s first meeting surprised the market with a unanimous vote against further quantitative easing.

Some MPC members, however, said more stimulus was warranted but they wanted to look at alternative means of providing it, with the committee set to publish a report on forward policy guidance in August. Having been a 4-month low against the euro below 1.15 it leapt nearly one percent following the release. It also gained one percent against the US dollar.

Andy Scott, premier account manager at foreign currency specialists at HiFX says UK employment numbers have also helped:
“At the same time, UK unemployment data revealed a larger than forecast decline in the number of people claiming unemployment benefit with the unemployment rate remaining at 7.8%.
 
“Today’s minutes will provide some much needed relief for sterling which has been the talk of significant decline for weeks. The recent data from the economy has been indicating pick up in activity which we have sighted as reason why the MPC may refrain from additional Q.E. The impact on sterling of more Q.E. would have likely been for it to weaken and this may also have played a part since Mr Carney stated some months back that it was not his wish to significantly devalue the pound.
 
“Since the Governor’s first meeting just under two weeks ago, sterling had fallen by over 2% against the euro and 1% against the US dollar as expectations increased that there will be more Q.E. It had fallen nearly 3% against the dollar to a 3-year low prior to a shift in expectations over when, and how quickly the Federal Reserve will begin tapering their Q.E. which came about last week. Central bank policy is the key driver of currency movement at the moment and that will likely be the case in the months ahead.
 
British pound remains vulnerable, but are losses against the euro likely?

Scott points out that sterling remains vulnerable to additional declines through the end of this year, though we would argue it’s not against every currency.

But, as ever with currencies it’s about relative concepts, not absolute ones.

With several central banks of the world’s largest economies also easing monetary policy, or maintaining it at very accommodative levels for the foreseeable future, the forecasts for sterling to plummet may well prove exaggerated.
 
Scott says:

“We feel this is particularly relevant against the euro where some forecasts are for a further decline of four or more percent despite the fact that the pound is down 10% from its peak last July and 6% from the beginning of this year.

"The ECB is one of the central banks that have pledged to keep interest rates at their current level or lower for the foreseeable future given the weak economic backdrop of the majority of Eurozone, so we don’t see a reason to buy the euro versus the pound. If the US economic recovery picks up pace then the most likely winner in 2013 will be the mighty greenback.”