Wednesday 13th August 2014
As you can see from today's Pound/Euro graph below, Sterling has plummeted today by around 1% against other currencies on comments made by the Bank of England governor Mark Carney, effectively signalling that interest rates are to remain low for the rest of this year. In my post yesterday I warned that if he was dovish about the UK economy then exchange rates could fall, and this is exactly what we have seen happen today. Let’s take a closer look at what he said and why the Pound has fallen against the Euro.
What did Mark Carney say in his speech?
The Bank of England has halved its forecast for average wage growth, and the Bank's latest quarterly economic forecast also indicated that it believed the level of spare capacity in the UK economy has narrowed to around 1% of GDP.
Mr Carney said there were still "a lot of uncertainties to contend with" given record participation in the jobs market, "remarkably weak" wage rises and a rising number of threats to the global economy.
He said that whenever interest rates did increase, they would still do so gradually.
Chris Williamson, chief economist at economic data firm Markit said it is was likely that "calls to raise interest rates would start to gather strength in coming months," but that an interest rate rise still looked some way off.
Read a full outline of his comments here.
What does this mean?
Effectively he is saying that as wages aren’t growing fast enough, there isn’t enough spare capacity in the economy to allow a raising of interest rates. This means that it is likely interest rates won’t be going up anytime soon, and when they do they will only rise very gradually.
Why has this caused the Pound to fall?
Sterling has been strong recently on speculation interest rates will be going up, as this drives investment into the currency due to the potential higher return on offer. Today’s comments indicate that rates will remain at their record low of 0.5% for some time to come. This means that investors have sold the Pound for currencies that offer a higher return, and the sell-off has caused the Pound to weaken and exchange rates to move down.
What does this mean for your currency requirement?
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Labels: Best Exchange Rates, BoE Interest Rates, Currency, Euro, FX, GBPEUR, Mark Carney, Pound/Euro, Sterling, Why has Pound fallen against Euro
