Bank of England votes 9-0 against an interest rate hike, US Dollar suffers

Enrique Díaz-Álvarez05/Feb/2016Currency Updates

After appreciating against the majority of global currencies over the past year, the US Dollar has faced a recent set-back, experiencing its largest two-day decline in seven years. Weak economic data and dampened expectations for US interest rate hikes has seen the Dollar suffer.

While bad news for some, these market conditions have allowed businesses with exposure to USD to capitalise on the U-turn and lock in exchange rates at this favourable level. This opportunity is prominent in an otherwise solid trend of Dollar appreciation.

Markets still await the first Bank of England interest rate hike in the UK. Expectations of when this will take place must now be delayed, following announcements yesterday.

At its monthly monetary policy meeting, the Bank of England once again kept rates unchanged, with long standing hawk Ian McCafferty unexpectedly abandoning his call for an immediate rate increase for the first time since July last year. In the accompanying quarterly Inflation Report, growth forecasts were lowered considerably, while inflation is now expected to remain below one percent throughout this year and to finally reach its target as late as 2018.

However, Carney denied speculation that the next rate move would be downwards, claiming that all MPC members saw an interest rate hike, rather than a cut, as the next likely move. These comments provided some relief for Sterling, although the Pound still ended lower against the Euro, and more-or-less unchanged versus the US Dollar.

We believe the market pricing for a UK rate cut in 2016, which is now as high as 30%, is unwarranted and does not reflect the economic fundamentals of the UK economy. We stand by our call for a rate hike in the fourth quarter, although this is heavily dependent on developments abroad.

Attention in the currency markets quickly turns to this afternoon’s US labour report at 1:30pm UK time. Our view continues to be that a healthy labour market is key to US growth and, providing we see job creation around the 200,000 level, we continue to expect additional Fed rate hikes roughly once a quarter. However, if the labour data misses this level today, we could push back those expectations.

Major currencies in detail:


Sterling traders didn’t quite know what to make of another mixed and not-so-super Bank of England ‘Super Thursday’. The slightly less dovish statement from Governor Carney caused the Pound to end 0.1% higher versus the US Dollar.

There were no massive surprises or significant announcements from the Bank of England yesterday. Sluggish wage growth and concerns about international markets had already pushed back market expectations for an interest rate hike deep into 2016.

The China-induced global slowdown and declining oil prices continue to remain concerns for UK policymakers, with Carney warning risks to the UK are increasing. The unanimity of the vote for no rate change therefore comes as no massive surprise.


The Euro’s remarkable rally in the face of diverging monetary policy continued yesterday, with the Euro ending the session 1% higher versus the US Dollar.

Yesterday’s Euro rally came despite more dovish comments from ECB President Mario Draghi on Thursday morning. Draghi’s comments once again illustrated the European Central Bank’s complete lack of tolerance for ultra-low inflation, suggesting that waiting too long to act could pose long-term risks.

We remain strongly of the opinion that the ECB is now all but certain to expand its monetary stimulus measures in March, including a cut in the deposit rate and quite possibly additional asset purchases.

The latest European Commission forecasts released on Thursday further suggested that inflation in the Euro-area was likely to remain subdued this year. Headline consumer price growth is expected to reach only 0.5% this year, with the economy to grow just 1.7%.


The US Dollar continued to remain under pressure on Thursday, due to dampened expectations for US interest rate hikes following weak economic data. The Dollar index fell by 0.8%.

Economic data on Thursday was relatively limited ahead of today’s crucial labour report. Initial claims for jobless benefits remained below the threshold 300,000 level, although ticked up slightly on a week previous to 285,000.

More worryingly, factory orders in December plunged by 2.9%, its largest single drop in a year. A strong US Dollar and weak global demand continues to provide a significant drag on the US manufacturing sector.

Today at 1.30pm UK time US Dollar traders will pay close attention to the latest labour report – the single most significant economic data release of the month. The unemployment rate, nonfarm payroll figure and average earnings will all be worth noting and could cause volatility in the Dollar if contrary to market consensus.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.