Bumpy Ride Ahead for GBP
Today, the focus is firmly on the UK with the UK Quarterly Inflation Report releases and we will also get to hear Bank of England Governor Mark Carney talk. This may bring some interesting surprises and we could well be in for a bumpy ride with GBP today. The Bank of England backed itself into a corner somewhat with the threshold they set for the unemployment rate. The BoE tied itself to an unemployment rate threshold and are now only 0.1% away from that level. Unfortunately the recovery in the economy is not strong enough to handle an increase in interest rates, which they promised would be their first step in unwinding stimulus. Linking monetary policy to the unemployment rate has proven to be an error for the MPC.
As expected, Margaret Yellen did not say anything unexpected in her address yesterday,although promises of continuity and taking “measured steps” in reducing stimulus was warmly received by the market. Due to labour market conditions, growth and inflation being at undesirable levels, The Fed plans to keep rates low for a very long time and want to rethink their unemployment rate threshold. Unsurprisingly Yellen has chosen not to do anything revolutionary before the next Fed meeting, choosing instead to say there is no present course for bond purchases and tapering. There could be a change in the unemployment rate threshold in March but there is no way that Yellen would let the cat out of the bag just yet.