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Put GBP/CAD on Your Radar as GBP/USD, GBP/CHF See Key Reversals

Put GBP/CAD on Your Radar as GBP/USD, GBP/CHF See Key Reversals

2014-07-15 10:10:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- GBP-crosses bullish both technically and fundamentally post-CPI.

- Time to put GBPCAD on your radar as USDCAD rallies too.

- Reminder that July forex seasonals in QE era work against USD.

When the Bank of England eliminated the link between the labor market and its interest rate regime in February, it did so under the guise that inflation would be under control over the medium-term horizon. That is to say, even as the emergency 0.50% main rate was to be maintained for an undetermined stretch of time into the future, there was little concern that the previous topside inflation ‘circuit breaker’ of +2.5% annualized would be hit.

Behind the low inflation environment is a low wage growth environment. Without wage growth, in the face of rising prices, consumers are faced with two choices: consume less of their available disposable income; or take on debt to finance consumption. In either case, economic growth potential –in the short-term or over the long-term – is cut down when wages stagnate. For the British economy which depends on consumption for about two-thirds of overall GDP, a consumer that’s losing purchasing power can be damaging.

In the most recent wage data, the 12-month private sector average weekly earnings through March increased by only +1.6% against an expectation of over +4%. Stripping out bonuses, wage growth was only +1.1% annualized. In context of inflation, real wages are dropping: inflation annualized in June was +1.9%, so if nominal wages increased by +1.1% or by +1.6%, real wages declined between -0.3% and -0.8% annualized by the end of June.

The weak wage environment has to be the biggest concern for the Bank of England, as it also reveals the state of the labor market. In the United States, where a significant portion of jobs created in the post-recession era have been part-time and the underemployment rate (U6 – those marginally attached, discouraged and/or part-time workers that want full-time employment) has stayed above 12%, wage growth has been noticeably weak as the supply of workers is plentiful.

Read more: EUR/USD Pinned as EUR/JPY Pivots from June Swing; USD/CAD Emerges

--- Written by Christopher Vecchio, Currency Analyst

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