Sterling’s fate dependent on wage growth inflation – 20th February 2018

Sterling fell below £/$ 1.40 versus a steadying US Dollar yesterday as tomorrow’s employment data and wage growth inflation number is being viewed as crucial to the markets expectation of an interest rate hike from the Bank of England in May. When comparing the comments made by BoE Governor Mark Carney last November with what he said following the most recent MPC meeting it is hard to know what was expected from inflation in the intervening months. It remains around 3% and it will take far more drastic action to bring it substantially lower in the current environment.

 

It is unlikely that a 0.25% hike in interest rates would have had a major effect on inflation and certainly not in such a short time period. Carney’s comments following the rate hike were decidedly dovish whereas, he turned hawkish more recently along with his MPC colleagues regarding an upturn in wages growth and the need for higher rates to control the inflationary effect. With real wage growth still well into negative territory, the Bank of England needs to be extremely careful not to choke off the tiny amount of growth being seen in the economy as Brexit uncertainty continues.

The US Dollar has been under performing this year based on the game of “catch-up” that will unfold from other G7 central banks as they make up ground on the US Federal Reserve in terms of monetary policy as the global economy starts to grow. There are, however, localized issues particularly in the Eurozone and UK that will either require the European Central Bank and Bank to England to either keep rates low or possibly reverse increases already made.

The weaker US Dollar will continue to provide a more competitive outlook for US exporters although any systemic or long-term fall could harm the relationship with holders of Government debt, particularly China and Japan.

The Euro traded in a very tight range yesterday against the US Dollar, contained by support at just below €/$ 1.2380 and resistance up between €/$ 1.2440 and €/$ 1.2460. The fall from the recent high of €/$ 1.2510 will have brought some relief to the ECB who are concerned over the continued strength of the Euro and the effect it will have on the competitiveness of Eurozone exports.