April 16, 2014

Couple of hours ago we saw the release of United Kingdom’s unemployment % and the result was extremely positive for the UK’s economy. The new number is 6.9% and that should mark the beginning of new era for England in terms that we should start expecting an increase in the official rate.

In theory that is really nice but the reality is usually different and I suspect that any talks about a possible rate hike in the near future are simply gobbledygook.

Similar to FED, UK also had an unemployment threshold, which was at 7% to start considering raising the rates and like FED backed away from it, so did Bank of England. In February 2014 Mark Carney , Governor of Bank of England, gave a press conference concerning inflation and he outlined many conditions to be met before any changes can be made in the official rate. In addition,he stressed many times that the rates may stay at low levels for some time to come. That being said, only two months ago, it is very unlikely that he is going to back away from his words and start doing the exact opposite.

Further more in his speech he mentioned spare capacity gap that also supports the idea that the rate hike in near future is rather improbable. Here’s what he said and I quote: „...now we are outlining what we tend to do, which is to close a spare capacity gap, over the next few years“, „.. and how we intend to do it? First, by waiting to rise bank rate until spare capacity has been absorbed further and eventually through gradual and limited rate increases“. All those words suggest that nothing is going to change in BOE policy any time soon.

Also the current exchange rate in GBPUSD is definitely high and that is not helping the current situation. Many remarks have been made about the subject but the pair keeps going higher. If a rate hike should occur now, it would send the Pound to the Moon (minimum) against the USD and any other major currency.

Capital Properties FX Team