Dollar and Sterling rally on Federal Reserve optimism and Bank of England dissents

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16 June 2017

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.

The Dollar continued to rally yesterday, as London traders digested the upbeat outlook from the Federal Reserve on Wednesday. Second-tier data out of the US appeared to confirm this optimism. Weekly jobless claims continue to bounce around near a multi-decade low, and some regional manufacturing activity indices came out stronger than expected.

he Bank of England delivered another hawkish surprise yesterday. Two more dissenters joined Kristin Forbes to call for an immediate hike, the biggest split in the MPC since 2011. The possibility that imported inflation will bring on hikes sooner than expected buoyed Sterling in spite of the weakness seen earlier in the day in UK retail sales.

Today should be relatively quiet, with no major news or central bank meetings expected.

Bank of England dissents surprise markets

The Bank of England meeting delivered a hawkish surprise. There are now three members out of eight that believe an immediate hike is needed to counteract the inflationary impact of the post-Brexit devaluation of the Pound. The recent increase to 2.9%, significantly above the BoE’s 2% target, has apparently set off alarm bells.

The gap between the MPC split and the market’s complacency about higher rates in the UK is remarkable. Rate traders continue to price in no hikes until 2019.

Second-tier data in US remain upbeat

Weekly jobless claims is perhaps the most valuable short-term indicator of the state of the US economy. It continues to bounce around multi-decade lows, in a sign that the US is nowhere near a recession and that the current moderate expansion still has room to run. Traders were clearly caught wrong footed by Yellen’s hawkishness and continued to square positions and clear Euro longs, pushing the common currency downwards throughout London’s trading session yesterday.