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Forex: Recent sterling bounce may not last

Yesterday’s session was rather like watching paint dry as volumes were thin due to Veteran’s Day in the US. Today will see activity pick up and with the focus on the UK, certainly this morning anyway, as we see unemployment data and average earnings released 09.30 UK time followed by the BOE’s Inflation Report at 10.30. Both events could have an impact on GBP which has still not given up the 1.5800 level against USD and is in fact at 1.5910 at the time of writing. UK unemployment has continued to surprise to the downside but the sticking point for the BOE and the wider UK economy has been the inability of wages to rise at a greater pace than inflation. Firms are willing to take on new staff, but they are not willing to give wage increases until the economic recovery has firmly established itself. The recent jitters in the Eurozone are not helping either. Whilst wage inflation is a lagging indicator and should pick up in time, judging by how anchored it’s been, the lag is taking longer than many had expected.

The BOE Inflation Report is expected to reveal downgrades to both inflation and growth forecasts considering that the price of oil has plummeted in recent moves. Net-net however for the UK the fall in GBPUSD has meant that the 30% decline in crude prices will not be passed on and it’s more of a 20% fall, so the economic uplift may not be felt as much as elsewhere. This is yet another reason why the market is now pricing in the first rate hike from the BOE in the second half of 2015 and why any upside in GBPUSD could be limited.

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