Sterling recovers ground after less dovish Bank of England minutes released

Claire Hogarth20/Nov/2014Currency Updates

GBP

Some respite at last for Sterling as the currency ended its long run of declines by climbing 0.35% on the Dollar and 0.2% versus the Euro after the Bank of England minutes were released.

As was generally expected, the Bank of England monetary policy committee maintained its 7-2 vote on interest rates for a fourth consecutive month at the release of the MPC minutes from the November meeting. A low inflation outlook in the medium term justified maintaining the current state of monetary policy according to the majority of the MPC members. Martin Weale and Ian McCafferty again argued in vain that the committee should ignore low inflation as it is mostly due to falling energy costs and a strong Pound. The slightly more hawkish than expected minutes contained a number of mixed messages, with concerns voiced over Europe and the housing market, although they acknowledged business investment growth remains buoyant.

Elsewhere in the UK yesterday, the Office for National Statistics had some sobering news regarding the squeeze on living standards. Real pay, adjusted for inflation, fell by 1.6% this year, returning wages back to levels not seen since the early 2000s as real wages fell for a sixth consecutive year. Limited releases in the UK today, however, the Office of National Statistics will be announcing the retail sales for October at 9:30am.

EUR

The Euro fell from its one month high on the Pound after the Bank of England announcement, ending the day 0.2% down on Sterling but 0.2% up on the Dollar.

Disappointingly for the Eurozone, construction output for September declined MoM by 1.8% and by 1.7% YoY. The monthly fall was the greatest since March 2013, while the annualised figure represented the largest yearly decline since December last year. However, the current account showed an increase in September from €22.8B in August to €30.0B, although the market impact was muted given the earlier BoE announcement.

A string of data out in the Eurozone this morning will be centred on the Markit PMI figures for Germany and for the whole Eurozone at 9.30am London time.

USD

The Dollar remained stable during London trading although the Federal Reserve minutes caused the US Dollar index to fall, before returning to its pre-minutes level.

There was mixed data out of the US on Wednesday. Building Permits showed a surprise increase in October, up 50,000 to 1.08M and matching its largest amount since July 2008. Yet, Housing Starts, the number of new single family homes constructed in the US, fell by 30,000 to 1.009M last month. The main event of the day, however, was the release of the FOMC minutes from the October meeting. In a slightly more dovish tone from the monetary policy statement, the Fed highlighted its worry about the global outlook, keeping in their “considerable time” stance with regards to the next interest rate hike. Although, the decision to end quantitative easing appeared to have been an easy one for the central bank, citing sufficient underlying strength in the global economy.

Most market volatility today will come from the US and the announcement of the Bureau of Labor Statistics inflation data for October at 1:30pm UK time, which is expected to show a slight dip from last month. A number of second tier data is also likely to cause some movement in the afternoon, including the Manufacturing PMI and Existing Home Sales Change at 3pm GMT.

Rest of the world

India’s Rupee weakened by 0.4% and fell to its weakest point since March after speculation that Dollar supply will slow after a fall in the country’s exports. Exports dropped by 5% in Asia’s third largest economy on this time last year, its first decline in seven months.

Yet another seven year low for the Yen on speculation that Japan’s Prime Minister, Shinzo Abe, will win an early election and, in the process, pursue his simulative monetary policy and structural changes.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.