As Sterling Gains on Positive Data, BoE Warns of Appreciating Currency

by on December 18, 2013 6:17 pm GMT

The Sterling increased to 1.6386 per dollar with the United Kingdom’s unemployment dropping to 7.4 percent, the lowest in five years. But, wait! The Bank of England (BoE) policy makers warn that continued appreciation may drag on the positive gains in the economy. The Monetary Policy Committee (MPC) said “any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery.”

Although gains in the Sterling helps fight against inflation, the higher currency will weaken demand in an already weaken global economic condition with the pound increasing almost six percent in the last six months.

Sterling bulls came out of the woodwork with the unexpected unemployment data. The MPC has given currency traders of hope after signaling a seven percent unemployment rate could allow the BoE to nudge rates higher. However, BoE Governor Mark Carney said that even if the unemployment target is hit, interest rates are not guaranteed to go higher. And rates will not go higher if an increasing pound dampens the economic recovery.  There is “some way to run before it would be appropriate to consider adjusting the exceptional level of monetary stimulus,” said Carney.

The MPC forecasts inflation to come down to two percent by the first quarter of 2014, while inflation data showed inflation drop from 2.7 to 2.1 percent over the last two months. The committee said that inflation will continue to soften as the Sterling becomes stronger.