Sterling and Euro rally ahead of today’s Bank of England meeting
12/May/2016 • Currency Updates•
The US Dollar declined against both the Pound and the single currency on Wednesday, while retreating against a basket of its peers for the first time in seven days.
The Pound overlooked yet another set of fairly dismal industrial and manufacturing production figures in the UK. The Euro also rallied to its strongest position versus the Dollar this week as investors consolidated gains on a day with no major economic releases in both the US and the Eurozone.
Investors now await today’s Bank of England meeting and press conference from Governor Mark Carney.
The BoE will be concluding its two-day monetary policy meeting this morning before announcing its interest rate decision and releasing its quarterly inflation report at midday UK time.
We are in line with the overall consensus, and expect the Bank to vote unanimously to keep interest rates unchanged. Governor Carney is likely to adopt a wait-and-see approach, while attributing most of the recent slowdown in the UK to uncertainty in the lead-up to next month’s referendum.
UK businesses remain worried about the Pound depreciating significantly in the event that British voters decide to leave the EU. In fact, four-fifths of Britain’s major businesses have already protected themselves against such depreciation by locking in current exchange rates, or hedging, according to a Bloomberg article quoting a survey released by banking researches East & Partners yesterday.
Today the BoE will also be releasing the latest growth and inflation forecasts. A sharp fall in Sterling and moderate recovery in oil prices are likely to keep the key inflation projections unchanged. However, the dismal showing in the latest PMIs suggests that growth forecasts could be revised down, which would provide a downside risk to Sterling today.
The minutes and inflation report are likely to remain on the dovish side, suggesting that a UK interest rate hike could be some way off.
Elsewhere, the New Zealand Dollar ended as one of the best performing currencies in the world after the Reserve Bank of New Zealand wrong footed investors by announcing no new policy measures at its meeting on Tuesday evening.
Major currencies in detail:
Despite another set of weak economic figures, Sterling ended 0.25% higher against the US Dollar on Wednesday.
The UK’s industrial sector officially entered into a recession for only the third time in the past eight years in the first quarter of the year, according to the latest figures from the Office for National Statistics.
Industrial output rose by 0.3% in the month to March, although declined by 0.2% on a year previous following a 37.3% drop in iron and steel production.
Output in the UK’s manufacturing sector also slowed by 1.9% year-on-year following growth of just 0.1% in March.
The goods producing sector of the UK looks set to continue providing a drag on economic growth in the coming months, particularly considering the intensifying uncertainty over the outcome of the EU referendum.
This afternoon’s Bank of England announcement will be the major release among the European economies this week.
The Euro strengthened by 0.35% versus the USD, despite no major announcements in either country yesterday.
Wednesday proved an unusually quiet day in the Eurozone, with no significant data releases. Bundesbank top official Andreas Dombret did, however, claim that the European Central Bank’s loose monetary policy stance was justified, given weak growth in the Eurozone and the subdued outlook for inflation.
These comments echo similar sentiments from Bundesbank head Jens Weidmann following much publicised, recent criticism of the ECB from Germany’s finance minister.
The latest industrial production figures for March will undoubtedly be the highlight in the Eurozone today. Output is expected to have ticked upwards to 1.1% from a year previous.
Greenback fell for the first time in a week against its major peers, ending the day 0.3% lower after a day in which global stock markets were retreating.
Announcements in the US were similarly thin yesterday, with the Dollar driven more by investor expectations for the next interest rate hike in the US. Following last week’s fairly unimpressive labour report which showed job creation of just 160,000 for April, financial markets are pricing in less than a 10% chance of a rate hike at the Fed’s next meeting in June.
With attention among the major currencies firmly fixed on the Boe, announcements in the US could take a backseat today. The import price index and weekly jobless claims are unlikely to prove major market movers.
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