Sterling plunges after Carney rules out imminent UK interest rate hike
20/Jan/2016 • Currency Updates•
The Pound’s recent dramatic and unprecedented decline continued on Tuesday following some dovish comments from Governor of the Bank of England Mark Carney. He suggested the era of near zero interest rates would remain in the UK for a while yet.
Speaking at an event at Queen Mary’s University in London, Carney claimed the UK economy faced a ‘powerful set of forces’ that prevent policymakers from raising rates. While there is currently no timetable for a hike, Carney claimed that domestic and global growth had proved weaker in the past few months, with the latest sharp decline in oil prices meaning inflation is likely to stay low for longer.
The central bank Governor also highlighted the rapid slowdown in China and gloomier outlook for the world economy.
Carney’s speech sent the Pound plunging against all of its major peers. Sterling tanked against the US Dollar over the course of the day to its weakest position in seven years, now a massive 5% down in just one month.
The relatively dovish tone of Carney’s speech means that we do not expect a rate hike in the UK until deep into the third quarter of the year at the very earliest. The possibility of persistently stagnant inflation, declining earnings growth and global economic headwinds suggests that any increase in the benchmark rate is off the table in the immediate term at least.
Major currencies in detail:
Earlier in the day the Pound had been given some much needed respite following the release of some encouraging inflation figures.
Consumer prices grew by 0.2% in December, its fastest rate since January 2015 having suffered throughout all of last year as a consequence of the dramatic decline in global oil prices. Core inflation also outperformed expectations, rising by an unexpected 1.4% from the 1.2% reading in November. This equalled its highest level since October 2014.
However, it was Carney’s comments that drove much of trading yesterday with delayed expectations for a Bank of England interest rate hike sending the Pound 0.7% lower against the US Dollar and 1.2% versus the Euro.
More economic data in the UK this morning could provide additional downside risks to the Pound today. Earnings growth and unemployment figures from ONS at 9.30am this morning are both closely watched by the Bank of England and will be the main focus for businesses with exposure to Sterling today.
A lack of negative surprises in Eurozone inflation kept the Euro well supported on Tuesday, with the single currency ending 0.5% higher against the US Dollar.
The latest inflation data in the Eurozone was in line with expectations yesterday with the headline number registering a meagre, albeit improved, 0.2% in December. Core inflation also ticked upwards to 0.9% from 0.8%, in a tentative sign that the European Central Bank’s large scale easing measures are having a modest upward effect on inflationary pressures.
By contrast, economic sentiment as measured by ZEW dipped this month to 22.7 from 33.9, while ECB member Villeroy suggested the Governing Council’s stimulus measures would boost Eurozone growth by one percent in the next two years.
Economic data in the Eurozone will be limited today, with producer prices in Germany this morning the only data point of note.
The US had a relatively quiet day yesterday following its bank holiday on Monday. The US Dollar index was subsequently little changed, falling by 0.1% despite strong gains for the currency against the Pound.
Events in the US yesterday were mostly overlooked by announcements elsewhere. The latest housing market index from the National Association of Home Builders came in unchanged for January. The index remained at 60, with a combination of the recent decline in the stock market, higher Fed rates and worsening weather dampening optimism in the sector.
Inflation data across the pond will be the main focus for US Dollar traders today. Consumer price growth is forecast to have accelerated in December at its fastest rate in eleven months.
Rest of the world
The Bank of Canada will, at 3pm GMT today, be announcing its interest rate decision and monetary policy statement, with the central bank widely expected to cut rates by a further 25 basis points.
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