Sterling plunges as Carney links monetary tightening to unemployment rate

Sterling fell across the board this morning after the Bank of England's quarterly inflation report during which the new Governor of the Central Bank issued forward guidance specifically in relation to when interest rates would rise. The bank said that an increase in interest rates would only be considered when the unemployment rate, which currently stands at 7.8%, fell to 7%. Whilst many economists had forecast this as one of the most likely conditions to be set for any forward guidance, sterling fell by over 0.5% against both the dollar and the euro before beginning to recover.
 
There were no major surprises in today's report, they were fairly realistic about the recent pick in growth which is encouraging but is merely a return to the historical average of what would be expected. We're still a long way from the escape velocity that Mr Carney has spoken about and there remains a lot of spare capacity in the economy due to the lack of growth. 
 
Now that the market has had the forward guidance confirmed and no longer has to speculate, this could actually be very positive for the pound since the economy is now performing better. Investors don't like uncertainty and that's shown in the value of sterling since Mr Carney began his tenure at the start of July. Perhaps now its value will better reflect the relative outperformance of the economy, particularly against our main trading block the Eurozone.

By Andy Scott, premier account manager at foreign currency exchange brokers HiFX.