Sterling had a better than expected day as the Bank of England very nearly voted for an increase in UK interest rates which was a surprise to the market but supportive of the pound.
You do wonder if there was some ‘method in the madness’ of the three who voted for an increase. The minutes of the meeting will be very closely scrutinised, especially given the speculation yesterday that after almost a year since the EU referendum result, we are now beginning to see the downside impact of Brexit. Non-food retail sales are suffering, the furniture retailer DFS is struggling and inflation is outpacing wages.
Admittedly inflation is almost at a critically high level, but its effect is expected to reduce as the impact of sterling’s rapid decline following the Brexit vote recedes. In addition, wage growth is slowing and the UK is suffering from political instability plus high personal debt levels. Perhaps the Federal Reserve’s recent interest rate decision has had some influence.
For now, until we get some clear direction, the UK will walk a tightrope of uncertainty and the pound will continue to be volatile.
GBP: BoE leaves interest rates unchanged … but in a split vote
Yesterday, sterling made gains as the BoE interest decision took the markets by surprise. While it was expected that the members of the Monetary Policy Committee would keep interest rates on hold, we did move a step closer to a rate hike, as the vote count shifted from 7-1 to 5-3. This is the closest we have come to raising rates in more than a decade.
The three members voting for a hike were Ian McCafferty, Michael Saunders and Kristin Forbes. It would appear that the central bank is ready to try and combat inflation, which posted a four-year high of 2.9% earlier in the week. It’s by no means a certainty that the rate will increase, especially if the economy continues to weaken.
Economic data has been fairly soft of late with wage growth dropping and the service sector slowing. Also released yesterday were the latest retail sales figures which showed a decline of 1.2%. This will be a concern as consumer spending makes up a large part of the nation’s Gross Domestic Product figures.
EUR: Eurogroup meet to discuss Greece
There was no significant economic data from the eurozone yesterday, but the euro did weaken against the US dollar following the positive statement from the Federal Open Market Committee in the US on Wednesday.
Much of the attention was on the Eurogroup meeting as they discussed the size of new loans to Greece. The nation requires more than €7 billion in new loans from the bailout fund to repay debt maturing in July. However, the money will only be released once lenders agree Athens has pushed through agreed reforms.
Given the recent interest rate hike from the Federal Reserve and yesterday’s split vote at the BoE, will the pressure on the ECB to increase rates intensify? Unlikely in the short term but it could be a game-changer in the longer term.
USD: dollar’s up-move buoyed by interest rate decision
The GBP and USD pair varied by over a cent during the course of yesterday. The pair spiked but fell short below 1.2800 after an unexpected BoE vote of 5-3 to leave interest rates on hold, indicating eroding tolerance for above-target inflation.
On the other end, the US dollar’s strgtehning was led by an aggressive Fed policy outlook and better-than-expected jobless claims data.
Today we have building permit data out from the US, which is forecasted to come in at 1.25 million.
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business trader on 020 7898 0500 or your Private Client trader on 020 7898 0541.