Currency Analyst since 2010

Economy behind GBP/USD

This week has been rather important for GBP. The Bank of England said on Wednesday that, on the one hand, the nation’s economy is set to grow more rapidly than it had expected just 3 months ago (GDP growth forecast for 2014 was raised from 2.5% to 2.8%) and the unemployment rate may fall to 7% much earlier than it had previously thought (not in the second quarter of 2016, but in the first quarter of 2015). On the other hand, the central bank stressed that a subdued outlook for inflation means it’s still unlikely to raise interest rates soon.

At the same time, the BoE had little discussion of the need for further stimulus – this is very unlike the Fed which maintains QE and the ECB which has cut its benchmark rate this month. Note that British inflation (2.2%) is higher than the US (1.2%) or the euro zone’s CPI growth (0.7%) – in the current situation this is GBP-positive. British unemployment declined to 7.6% in Q3. However, not everything is rosy: British retail sales contracted by 0.7% in October. The hope is that UK consumers are saving ahead of the holiday shopping season and spending will increase in Nov. and Dec.

Although the tone of the UK central bank was the most upbeat in years, Governor Carney tried to do his best to make the markets believe that the rates won’t be raised soon. The bottom line is that he may have succeeded in that, but as the Fed’s Janet Yellen sticks to her dovish views, GBP/USD may have fundamental support.

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