Sterling soars as Bank of England holds rates, US Dollar continues to fall
18/Mar/2016 • Currency Updates•
Sterling strengthened sharply across the board on Thursday after the Bank of England kept interest rates unchanged. The central bank reiterated that UK rates are more likely to rise, than fall, over the next two years, even amid the global economic slowdown.
The monetary policy committee voted unanimously to keep rates unchanged for the second straight month, dashing some expectations that one of the more dovish members could vote for an immediate cut.
Meanwhile, the US Dollar suffered heavily following Wednesday night’s Federal Reserve meeting, in which FOMC members lessened their expectations of future US interest rate hikes. The committee now expect just two hikes in 2016, rather than four.
The market continues to price in just one hike by the Fed this year at the September meeting, although we think this is a serious underestimation. The Dollar fell by over 1% against its major peers yesterday, touching its weakest position against the Euro in five weeks.
In the G10, the Australian Dollar soared to an eight month high after a surprisingly sharp drop in unemployment lessened the chance of a rate cut in the near term. The Norwegian Krone also strengthened as Norges Bank’s interest rate cut by 25 basis points to 0.5% was almost universally expected.
Among the emerging markets, the South African Rand and Brazilian Real both gained almost 4% at one stage against the US Dollar. The Real spiked following a second day of mass protests to oust unpopular President Dilma Rousseff, while the Rand rallied hard after the South African Reserve Bank surprised the markets by raising its benchmark interest rate again. This time by 25 basis points to 7% in a bid to tame inflation.
In fact, almost every emerging market currency ended the day higher against the USD, buoyed by the prospect of more gradual US rate hikes and another increase in oil prices.
Major currencies in detail:
The Pound rallied for a second day against a weak US Dollar, ending a massive 1.7% higher, and 1% up versus the Euro.
Interest rates in the UK entered their eighth straight year at a record low 0.5% yesterday after the Bank of England voted 9-0 to leave rates unchanged.
Discussion during this week’s BoE meeting was heavily focused on the EU referendum, with the Bank warning a Brexit vote may ‘delay some spending decisions and depress growth of aggregate demand in the near term’. Policymakers also attributed the recent sharp decline in Sterling to uncertainty among investors in the run-up to the referendum.
The near-term inflation outlook has changed little since the central bank’s last meeting and, contrary to the current market pricing, there was no mention in the minutes of further monetary easing.
The Bank of England’s quarterly bulletin at midday is the only economic release today, although it is not expected to move markets.
The Euro continued its surprising march upwards yesterday, even amid diverging monetary policy with the US. The single currency ended 0.6% up against the USD.
Core inflation in the Euro-area provided a pleasant surprise yesterday, revised higher to 0.8% from 0.7% for February. The headline measure of consumer price growth remained unchanged at -0.2%. A lack of inflationary pressures was one of the main driving forces behind last week’s ramped up easing measures from the ECB.
The trade surplus in the Eurozone also grew in January, increasing modestly to €21.2 billion.
Producer prices in German this morning are the only announcement in an otherwise quiet end to the week in the Eurozone.
Expectations for a slower pace of Fed rate hikes weighed on the US Dollar again yesterday. The US Dollar index subsequently fell by 0.5%.
The latest US labour data continues to impress. Jobless claims for last week beat expectations at 265,000, marking the longest streak of sub-300k claims in the US in over 40 years.
JOLTS job openings also came in at a solid 5.54 million for January, while the Philly Fed Manufacturing survey registered its first positive reading in four months, increasing to a seven month high of 12.4.
A number of speeches from Federal Reserve members this afternoon could cause moderate volatility in the US Dollar today.
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