UK General election
A major potential risk for Sterling over the short to mid-term is the potential of an inconclusive majority in government with the coalition discussions being drawn out. The recent polls for the election don’t show a conclusive majority for either of the major political parties, with one of the minor parties expected to be the maker of any coalition leadership.
Bank of England rate hike
The market has priced in a rate hike for Q1 2016, however the contradictory output from the MPC has led some traders to think that it could be sooner. The Governor of the Bank of England, Mark Carney commented at the inflation report that inflation over the medium term would increase. Carney expects that the recent fall in inflation due to the move in commodities would be overcome with inflation picking up significantly. As the MPC attempts to target policy for 12 months ahead, if is expected to pick up early next year, hike could come in Q4 2015.
Unemployment continues to fall as the recovery takes hold, the Bank of England has highlighted that wage growth and labour capacity are the signals that they need to begin tightening of monetary policy. As the availability of skilled labour diminishes, employers would need to increase wages, with the expected outcome being inflationary pressures. The criticism has been that a large proportion of new jobs are with less than full employment, and poor contractual terms.