Sterling climbs as Bank of England brushes aside overseas risks
11/Sep/2015 • Currency Updates•
The Pound rallied by 0.7% against the Dollar yesterday following the release of the Bank of England minutes and interest rate decision, despite a lack of any significant change in monetary policy stance.
As expected, the Bank of England left its record low level interest rate unchanged at 0.5% following its two-day monetary policy meeting this week. Once again, policymakers voted 8-1 in favour of maintaining rates, with the sole dissenter Ian McCafferty, who became the first MPC member to vote for a rate hike since January at last month’s meeting. McCafferty continued to argue domestic demand was strong enough to warrant an immediate rate hike. The central bank claimed that downside risks from overseas had increased since their last meeting, although that it would be premature to draw any strong conclusions from recent events and its likely impact on activity in the UK. The lack of any major concern on the part of policymakers towards the slowdown in China was likely behind the Pound’s rally and one of reasons why we continue to expect a UK rate hike in early 2016.
Meanwhile, growth forecasts for the third quarter were revised lower to 0.6%, very much in line with the recent underwhelming data we have seen of late. Views on inflation, however, were mixed, with some members seeing a risk of overshooting the 2% medium-term target, despite consumer prices likely to remain near zero for the next few months.
The major data point of the day will once again come from the Bank of England. The central bank will be announcing the latest consumer inflation expectations at 9.30am today.
Despite a lack of major data in the Eurozone, the Euro rebounded against the Dollar yesterday, up 0.6%, although finished slightly down on the Pound (-0.1%) following the Bank of England’s announcement.
The increase in the single currency, yesterday was predominantly driven by a lack of sentiment towards the US Dollar, given there were no significant announcements in the Euro-area. Minor data released yesterday suggested that the recovery in the industrial sector of the Eurozone economy is far from uniform. Figures showed Spanish factory output was at its highest pace in fifteen years, surging by 5.2% on an annualised basis. In contrast, economic performance remains poor in France, with industrial productivity in the nation declining by 0.8%.
Today, we’ll see a string of economic releases from a number of major Euro-area nations. August inflation data will be released for Germany and Spain as well as Italian industrial production during early London trading.
The US Dollar weakened by 0.5% against its major peers yesterday following a stabilisation in global stocks and mixed data released ahead of next weeks Fed meeting.
Initial claims for jobless benefits came in bang on forecasts at 275,000 for last week. The four-week moving average ticked up slightly, although remained at a strong enough level that would suggest a tightening in labour market conditions. Wholesale inventories also impressed, coming in a better-than-forecast -0.1%. This marks the first time the measure has printed negative since May 2013, in a tentative sign that businesses are beginning to whittle down large stockpiles of merchandise.
By contrast, the prices of exports and imports both fell by more than a month previous. Import prices fell by 1.8% in August, with a strong Dollar and weak oil prices pointing to stubbornly weak inflation. This decline was driven primarily by a decrease in fuel prices, which fell 13.3%.
A number of second-tier economic releases will come out in the US economy to end the week. The producer price index and monthly budget statement are the focal points. Traders, however, will already have one eye on next week’s crucial FOMC meeting, which provides the first realistic opportunity in years that we’ll see an interest rate hike in the US.
Rest of the world
The Brazilian Real tanked yesterday, depreciating by over a percent-and-a-half against the Dollar to approach a record low level. This came after Standard & Poor’s cut the country’s sovereign rating to junk late on Wednesday evening.