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British pound hits 1-month low following Inflation Report

H.S. Borji
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The British pound fell to a one-month low against the US dollar as the Bank of England’s Inflation Report overshadowed another month of solid employment data.

The BOE’s inflation outlook was largely unchanged, as central bank Governor Mark Carney downplayed expectations of an earlier-than-expected rate hike. Expectations the central bank would boost interest rates sooner than forecast helped drive the British pound to five-year highs against the dollar last week.

“The exact timing of first adjustment of bank rate will be a product of the evolution of the economy,” Carney told reporters in London today. “There’s additional wasteful spare capacity that can be used up.”

However, the central bank remained upbeat about UK recovery, citing strong growth in output and real incomes. The BOE forecasts the economy to grow 3.4 percent this year, exceeding the latest estimates from the International Monetary Fund and European Commission. The IMF has benchmarked UK growth at 2.9 percent this year, while the European Commission recently revised its growth outlook for the UK from 2.5 percent to 2.7 percent.

“The recent strong performance of the UK economy has continued,” the BOE said in the Inflation Report. “Output has grown robustly, unemployment has fallen further and inflation is close to the 2% target. A gradual strengthening in productivity and real incomes, together with growing confidence of companies to invest, should underpin the durability of the expansion.”

A subdued rate-hike outlook sent the British pound to fresh lows. The GBPUSD pair declined 0.32 percent to 1.6773, recovering from a daily low of 1.6766. The pair looked poised to re-test 1.70 after falling just short of that level the previous week. The pair fell below the initial support at 1.6788, leaving 1.6746 as the next support level. On the upside, technical resistance is likely found at 1.6855, followed by 1.6897.

The EURGBP rebounded sharply, advancing 0.35 percent to 0.8173. The pair exceeded the initial resistance of 0.8160, leaving 0.8181 as the next target.

Sterling was unable to rally despite another solid month of employment data. UK jobless claims declined 25,100 in April, after falling at a revised pace of 30,600 the prior month, the Office for National Statistics reported today. A consensus of market analysts said jobless claims would decline by around 30,000.

The ILO unemployment rate fell from 6.9 percent to 6.8 percent in the first quarter, a five-year low. Job growth in the first quarter rose at the fastest pace in 43 years, official data showed.

Average earnings rose at a steady pace. Earnings including bonuses were up 1.7 percent, between January and March, matching the previous three-month period. Earnings excluding bonuses rose 1.3 percent over the same period, down from 1.4 percent between December and February.

With the March consumer price index at 1.6 percent, average earnings rose faster than inflation for the first time since 2010.

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