The British pound extended its gains against the US dollar thanks to stronger than expected employment numbers and a mildly hawkish quarterly inflation report.
In contrast to the declines in the employment components of manufacturing and service sector PMI, unemployment in January dropped for the 16th month in a row to the lowest level in over 30 years. Despite a slowdown in the housing market and the financial sector, the UK labor market remains strong, offsetting a decline in average earnings growth. The Quarterly Inflation Report was equally bullish for the British pound. Even though BoE Governor King recognized the downside risks to growth, he raised the bank’s inflation forecast and warned that near term inflation will continue to breach their 2 percent goal and runs the risk of breaching the government’s 3 percent limit as well. If inflation rises beyond 3 percent, King would be obligated to write a letter of explanation to Alistair Darling, the Chancellor of the Exchequer and in doing so, it will be difficult for him to justify another rate cut.