The pound fell heavily yesterday

The pound fell heavily yesterday against the majority of the 16 most actively trade currencies after a ‘dovish’ report from the Bank of England and the latest UK employment data.

Presenting the latest quarterly inflation report, Bank of England (BoE) Governor Mark Carney said “The economy has just started to head back to normal. As well, there remains considerable uncertainty about the degree of slack in the economy and how much momentum it continues to have going forward”.

Carney went on to explain in no uncertain terms that in his opinion, the Bank base rate is not the ideal tool to act against any excessive rise in house prices but instead, it should be the last line of defence, leaving that job up to the Financial Policy Committee (FPC) who meet next week. Of interest, the FPC have amongst other powers the ability to instruct banks to tighten their mortgage criteria.

Ahead of the latest quarterly inflation report, some analysts had been predicting that we could even see an increase in UK interest rates this year. UK interest rates have now been stuck at their historic low level of 0.5% since March 2009. Today’s comments from the BoE seem to have put paid to that idea, at least for the time being and the pound duly suffered and fell heavily across the board.

In addition, the Office for National Statistics (ONS) also reported yesterday that the unemployment rate for the UK fell to a 5 year low of 6.8% in the three months to March from a rate of 6.9% in April.

The claimant count fell by 25,100 in April, a drop of 399,600 from the April 2013 level. Of interest, there were 30.43 million people in work during the January to March period, 283,000 more than in the previous quarter. This is the quickest rate in employment gains since 1971.

The latest ONS data also showed that pay, including bonuses, increased by 1.7% between April 2013 and April 2014.

Analysts at Capital Economics commented that “Nonetheless, there are still signs that plenty of slack remains in the labour market. The proportion of people who are in part-time work and would like to work longer hours or in temporary employment and would like a permanent job both remain extremely high.”

The euro benefited from the market’s reaction to the BoE and employment reports in the UK, despite some worse than expected industrial production data out of the euro zone which registered a contraction of 0.3% month-on-month in March. Output is now 0.1% lower than in March 2013. Of concern, production levels diminished in all the main countries within the single currency area, that is Germany, France, Italy and Spain.

In the US, the US Bureau of Labor Statistics (BLS) reported that US producer prices increased by 0.6% month-on-month in April with prices rising by 2.1% between April 2013 and April 2014. This is the fastest growth rate since September 2012.

The improvement helped the S&P500, one of the main stock market indices in New York to hit a figure of 1900 for the first time in history.