This week has been a game of two halves for the UK’s currency as gentle gains made earlier in the week were reversed in dramatic fashion on Wednesday. The cautious optimism that had given rise to sterling appreciation against the euro and US dollar was quashed on Wednesday when the Average Earnings Index came out below what was expected and Bank of England (BoE) Governor Mark Carney made it clear to investors that an increase in interest rates was not imminent, an important factor in sterling’s recent gains. Even poor economic data out of the Eurozone and the US failed to reverse Wednesdays rapid fall from grace for sterling.
The fact that wages are not rising as quickly as prices has been a worry for the public and policymakers alike in recent weeks, and Wednesday’s data lent weight to the argument that interest rate hikes should be held back until we see more parity. This, along with the Governor of the Bank of England’s continuing assertions that interest rate increases will be small and gradual and unlikely to happen any time very soon, was the catalyst for the markets to sell sterling. As sterling sits in a considerably worse position than at the beginning of the week we should not be surprised to see further rapid rate movements as events unfold. This morning, markets await the release of the UK’s second estimate of growth data. The preliminary data indicated that we saw 0.8% growth in the second quarter of 2014. A divergence from this figure is likely to affect sterling performance as we see out the week.