Sterling slips after Bank of England signals no rush to hike rates

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3 February 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound erased much of its gains from earlier in the week on Thursday after the release of the Bank of England’s January meeting minutes appeared to show the central bank was in no rush to begin hiking interest rates again.

A
s expected, the BoE kept its policy unchanged, holding rates steady at their record low 0.25%. Policymakers appear comfortable with its existing policy, having slashed rates in August last year, citing risks posed by Britain’s impending exit from the European Union. Investors hoping for a signal that interest rates could be raised later in the year were left disappointed, sending the Pound lower for the day against just about every other G10 currency.

The Bank of England also failed to make any meaningful changes to its inflation forecast during its Quarterly Inflation Report, although did dramatically raise its growth forecast for this year. The Bank now expects the UK economy to grow by 2% this year, up significantly from the 1.4% estimate in November.

Ahead of this afternoon’s nonfarm payrolls report in the US, the Dollar sold-off broadly off the back of the Federal Reserve’s lack of clarity over the timing of its next interest rate hike. A lack of obvious signals that the March FOMC meeting remains live kept the greenback on the back foot yesterday.

The next major event risk will undoubtedly be this afternoon labour report in the US at 13:30 UK time. Any figure at or around the 175,000 consensus would likely provide decent support for the Dollar today.

Major currencies in detail

GBP

The Pound slumped 1% yesterday as the market began lowering its expectations for a rate hike by the Bank of England this year.

Market implied probability for a 25 basis point rate increase was nudged lower to around 35% from 50% prior to the central bank’s meeting. Despite this, we continue to think the next move in rates is much more likely to be up than down.

Earlier in the day the latest construction PMI was a slight disappointment, although its lack of contribution to UK economic output meant the reaction in Sterling was limited. The index declined to 52.2 in January from the 54.2 recorded in December.

This morning’s services PMI for January is expected to have slowed modestly from December. Sterling will largely be driven by events in the US today.

EUR

A lack of clear signs for a March hike by the Fed sent the Euro 0.2% higher against the US Dollar yesterday.

Announcements in Europe were fairly light on the ground on Thursday. Producer prices provided further incentive for the European Central Bank to hold off from increasing its monetary stimulus measures further in the coming months. Prices rose more than expected in December, jumped 1.6% on a year previous, its highest rate in almost four years. This was driven largely by an increase in energy prices caused by the recent stabilisation in global oil prices.

Mario Draghi also spoke in Slovenia on Thursday, although added nothing in terms of monetary policy.

The Eurozone services PMI and retail sales this morning are unlikely to significantly shift the Euro today, with the US labour report the biggest market mover.

USD

The US Dollar had a mixed session on Thursday, ending London trading unchanged as traders continued to digest the Fed’s statement on Wednesday evening.

Traders mostly overlooked the generally positive economic data out of the US economy yesterday. Initial jobless claims beat expectations. Claims for jobless benefits fell last week to 246,000 from 260,000, around its lowest level in over four decades.

Focus was instead on the Fed and political developments after Donald Trump unnerved investors after using aggressive language on Iran and a refugee deal with Australia.

This afternoon’s labour report should give us a good indication as to whether a Fed hike at the next FOMC meeting in March remains on a real possibility. As always, the unemployment rate and average earnings figures could be key for the Dollar this afternoon.

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