Pound Sterling: The new strength is still fragile – Commerzbank

The Pound Sterling (BP) was the only currency to hold up reasonably well against the US Dollar on Tuesday. Economists at Commerzbank analyze GBP outlook.

Strong UK employment report

We saw a strong employment report from the UK's Office for National Statistics (ONS). 48K jobs added instead of 18K lost, a low unemployment rate and, last but not least, higher income growth: nothing was missing from the overall positive GBP picture. 

The underlying data (especially wage growth) leave little room for interest rate cuts, and the rosy employment situation makes a prolonged restrictive monetary policy generally acceptable. Ultimately, however, what matters is whether the market expects a central bank to overcompensate for a positive inflation surprise, i.e. to revise its interest rate expectations more than its inflation expectations.

This is usually the case. Tuesday was no exception. This is not surprising, especially now. After all, it is particularly difficult to assess the policy reaction functions of central banks at the moment. This assessment is therefore variable and subject to particularly large fluctuations in the event of surprising data releases. It is therefore understandable that the Pound has risen, but also in this case a warning is in order: The new strength is still fragile.