Bank of England in no hurry to hike interest rates as traders await US labour report
06/Nov/2015 • Currency Updates•
The Bank of England sent the Pound sharply lower across the board on Thursday following a dovish monetary policy statement that caused many analysts, including ourselves, to push back expectations for the first interest rate hike in the UK since the financial crisis.
While the vote remained unchanged at 8-1, dovish rhetoric in the statement, including greater downside risks to growth, suggests policymakers are in no rush to raise rates and that a rate hike in the first half of 2016 may not be on the cards.
Thursday’s report has created further uncertainty for UK businesses as markets have turned more volatile. A delayed rate increase in the UK can have a mixed impact on domestic businesses trading internationally. With an interest rate hike in the US becoming ever more likely, those with trade flows to the US could see further downward pressure on GBP/USD.
Focus among major currency traders will quickly turn to today’s US labour report at 1:30pm GMT, seen as crucial in helping the Federal Reserve decide whether or not borrowing costs in December will increase. Given the Fed remains data-dependent, we believe a lack of any negative surprises in the next two labour reports should ensure we see a rate increase in the US before year-end.
Any sizable negative surprises below the 180,000 job creation level that is generally expected could cause a USD sell-off today and delay calls for a rate increase. A figure in excess of this level would put the central bank firmly on course for a rate hike next month, and provide good support for the Dollar this afternoon.
Major currencies in detail:
Sterling fell sharply, down by 1% against the US Dollar and 1.2% versus the Euro, after yesterday’s dovish Bank of England announcements.
The central bank revised lower its growth forecasts, citing downside risks from emerging markets, with the weaker global economic backdrop mentioned no fewer than four times in the statement.
This is significant in that global developments are now a key factor on which the timing of rate increases will depend. Until now, the Monetary Policy Committee was focusing mostly on domestic demand and the UK labour market. Sterling strength was also singled out as a persistent factor in dampening inflation pressures, which is now expected to remain below 1% until the second half of next year.
The MPC also implicitly endorsed market forecasts for a much later hike. In view of this dovish statement we will be pushing back our forecast for the first hike. The MPC is clearly in no hurry at all to raise interest rates.
Focus in trading today will likely remain on the Bank of England, with industrial and manufacturing figures this morning likely overlooked.
The Euro gained across the board yesterday, up by 0.25% versus the US Dollar.
President of the European Central Bank Mario Draghi spoke once again yesterday morning regarding monetary policy. Draghi claimed that the asset-purchasing programme, known as quantitative easing, was one of the many tools the central bank could use to boost inflation.
He also suggested that the existing programme, launched back in March, was so far “undoubtedly effective”, despite price growth remaining stuck at around zero. There is now growing expectation that the ECB will announce an expansion of its QE programme as soon as next month.
Elsewhere, retail sales pointed to a further slowdown in Eurozone domestic demand. Sales decreased by 0.1% in September, the first decline in three months.
No major data in the Eurozone today, although Germany industrial production this morning is worth noting. Most attention will be on the US today.
A mixed day for the Greenback saw the currency unchanged against its major peers.
The Dollar remained well supported on Thursday by comments made a day previous by Janet Yellen that suggested a December rate hike was “live”.
In terms of economic data yesterday, jobless claims rose marginally last week. Claims rose from 260,000 to 272,000 for the week ending 31 October, according to the Labor Department. The more representative four-week moving average, however, continued to remain strong at 262,750, just shy of its 42-year low.
Meanwhile, labour productivity increased in the third quarter by 1.6%, above forecast, while labour costs for the same period rose by 1.4%.
All attention today is on the labour report at 1:30pm. As always, unpredictable currency movements are to be expected.
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