Currency Watch: Sterling’s woes continue

The British Pound (GBP) has continued to wobble this week although we did see a fight back on Monday.

GBP had picked up on the back of euro losses through political issues in Spain and Italy against but was vanquished quickly as they were by surpassed another round of better-than-expected European data.

The reasons for sterling weakness are numerous: poor growth, current account (export strength) issues, prospects of further quantitative easing, a deficit reduction plan failing to hit self-imposed targets, the likelihood of a ratings downgrade all have weakened the position of the GBP in investor’s eyes.

Likewise the strength of the US economy as shown by increased risk optimism and improvements in all sectors has helped the USD move onwards. As long as this continues then you would suspect that investors will remain happy to get into USD for the longer term.

Here in the UK, the Bank of England meeting would normally be the headline grabber, even if, as is the case today, we expect no change in interest rates or asset purchases from the Monetary Policy Committee. However, at 9.45am we finally are able to sit and obtain some clarification from the future Governor of the Bank of England, Mark Carney.

As we said yesterday this is Carney’s first proper sit-down in front of the UK’s Treasury Select Committee since taking the job of BoE governor.

What we were hoping to learn from him is whether the sea-change that most expect Carney to bring to the Bank of England will actually come to pass. Does the Bank’s remit on controlling inflation need changing alongside the tools it can use, like forward rate guidance? How bad does the UK economy have to be for a policy shift to occur? We didn’t really get an idea about this kind of detail from Carney this week, but he did promise a thorough shake-up as his reign gets underway this summer.

At his Davos speech questions from journalists were prohibited, but we did see him butt heads with the OECD’s Angel Gurria over whether monetary policy can be made looser globally and what effect it can have. Questions should be forthcoming on that and we would suspect that opposition members of the TSC may want to make Osborne’s man’s first appearance a testing one.

Sterling initially spiked higher on a written answer of his that stated that Bank of England must exit unconventional policy i.e. an end to QE. No time limit on this was given however so we have to view it through the prism of his 5yr term. He also said that flexible inflation targeting is the most successful monetary framework in existence but debate should be encouraged. This a hint towards Nominal GDP targeting, a combination of inflation and growth that he has come out in favour of before, but discussion on that remained muted.

Jeremy Cook is chief economist at World First foreign exchange