A hawkish tone from the Bank of England, a dovish tone from US policymakers and the clipped wings of a Dutch politician drove currencies yesterday as we were approaching the end of a lively week.
The pound bounced on hints that interest rates could rise and the unanimity of the Bank of England monetary policy committee ended.
Meanwhile, the US dollar weakened after worries that two further rate rises this year might be in jeopardy. Exit polls in the Netherlands strengthened the euro as the Dutch put a finger in the dyke, holding Europe’s far-right populism at bay.
GBP: sterling boosted by Bank dissenter
Following the Federal Open Market Committee meeting on Wednesday, we saw sterling strengthen slightly against the US dollar as the FOMC rhetoric sounded less optimistic than hoped.
Yesterday it was the turn of the Bank of England to release its interest rate decision. As expected, we saw the rate kept on hold at 0.25%. The announcement of the outcome contained a surprise. One of the nine members of the monetary policy committee, Kristin Forbes, had concerns about the path of inflation and voted to raise rates. This is the first time since July 2016 that the vote to maintain rates has not been unanimous.
The announcement aired towards the hawkish side and we may be closer to a rate hike than previously thought. Within the minutes, a hawkish tone can be spotted in this extract: ‘Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.’
The central bank cut rates after the Brexit referendum last year to a record low in an effort to fend off a possible economic shock.
Inflation has been a concern of many since we saw a significant drop in the value of sterling. The key measure of inflation is set for release next week, in the form of the consumer price index. Last month it ticked higher to 1.8%. Since then Sainsbury’s has become the latest bulk retailer to warn of the pressure to raise prices.
EUR: euro rallies to five-week highs
Following on from the FOMC meeting, where we also saw the euro strengthen against the dollar, we had the release of the exit polls from the Dutch elections. The exit polls are a significant development, given that the Dutch Electoral Council will not announce the official result until Tuesday next week. And a week is a long time in the world of currencies.
A disruptive far-right win could provide momentum for the remaining two major European elections this year in France and Germany, but the exit polls show that the liberal party (VVD), led by Prime Minister Rutte, has emerged as the biggest party and is forecast to win 33 seats. The challenge from the far-right party PVV, led by Wilders, is forecast to win 20 seats.
The next stage revolves around coalition talks which could take months. Wilders is not likely to be part of any coalition negotiations, with all major parties unwilling to work with him because of his populist, anti-immigration policies. With this combination of a less optimistic FOMC and a more certain political backdrop, we saw the euro strengthen to hit a five-week high against the US dollar.
In terms of economic data, it was fairly quiet yesterday. Inflation came in at 2% for February. This followed preliminary estimates, so although it was an acceleration from the 1.8% in January, it was hardly a surprise.
In other news, there will be heightened security fears in France. Two were injured in a shooting at a French school and a letter bomb exploded at the International Monetary Fund office in Paris.
There was also news that the German finance ministry in Berlin intercepted a parcel bomb sent to Finance Minister Wolfgang Schaeuble on Wednesday.
The last trading session of the week sees the G20 meeting in Germany. G20 meetings are attended by finance ministers and central bankers from 20 industrialised nations where policy is discussed and crafted.
USD: US dollar at a one-month low, falling 0.3% against a basket of major currencies
It came as a surprise to see the dollar weaken yesterday, following the interest rate hike the day before, after the FOMC gave a dovish tone towards further rate hikes later in the year. Whilst many FOMC members still believe that there will still be two further hikes this year, it’s not knowing when these might occur that seems to have weakened the dollar’s position and caused uncertainty over the pond.
Looking to the day ahead, there is very little in terms of US data, other than the University of Michigan consumer confidence survey at 2 pm. Investors will be keeping a keen eye on this announcement, to gain a better understanding of potential changes to income/wages and to predict drops in consumer spending.
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