Sterling recovers ground ahead of Bank of England meeting
10/Dec/2015 • Currency Updates•
The main event of the day today will no doubt come from the Bank of England which, at midday, will be announcing its interest rate decision and releasing the minutes from its two-day monthly monetary policy meeting. Rates are not expected to rise now but any indication that the expected hike may happen sooner than anticipated could see the Pound continue to strengthen.
The Pound surged on Wednesday in the run-up to today’s meeting, with investors betting on a change in the recent cautious stance adopted by policymakers. This is given the BoE’s concerns regarding a strong currency and the 2.3% depreciation we have seen in Sterling since the last central bank meeting.
We expect the vote to remain 8-1 in favour of no hike. The key will remain comments on financial instability and global economic fallout arising from it, as well as the impact of Sterling strength on inflation and monetary policy.
We’re observing more UK companies with a significant customer base in Europe hedging their inflows over the next year and beyond, before the expected divergence in Sterling and the Dollar versus the Euro takes effect. In particular, with the recent strengthening of the Euro, despite the differing monetary policies between the Fed and BoE on one hand and the ECB on the other, there may be a temporary dislocation of the long-term trend.
Elsewhere, commodity currencies firmed somewhat yesterday after oil prices stabilised having reached six-year lows on Monday and Tuesday.
Major currencies in detail:
The Pound surged yesterday ahead of today’s Bank of England announcement, with the currency gaining by 0.8%.
Almost all attention will be on the BoE today. At the last meeting, Sterling strength was singled out as a persistent factor in dampening inflationary pressures. Any change in this view, given recent Sterling weakness, could cause the Pound to rally today.
The latest Reuters poll released yesterday regarding the next UK interest rate increase suggests that solid growth in the domestic economy will allow the Bank of England to begin hiking interest rates at some point in the second quarter of 2016, marginally earlier than we are forecasting.
Before the BoE, trade balance data this morning could cause moderate Sterling volatility.
The Euro continues to surprise forecasts, gaining strongly against the US Dollar yesterday despite the divergence in monetary policies between the ECB and the Fed. The Euro ended the London session 0.7% higher.
The only major economic indicator data in the Eurozone yesterday came out of Germany. Exports from Europe’s largest economy fared worse than expected in October, with exporters taking a hit from slower global growth and weak commodity prices. Exports fell by 1.2%, although imports plunged by 3.8%, swelling the trade balance to 20.8 billion Euros.
Meanwhile, ECB member Ewald Nowotny blamed analysts, and not the ECB, for creating the mass misunderstanding last week that led to the sharp Euro rally following a smaller-than-expected increase in monetary easing measures.
No major economic releases in the Eurozone today means that most attention will be on the BoE and Swiss National Bank interest rate announcements. Inflation and industrial production data in France this morning will likely have some focus.
The US Dollar fell yesterday by 0.6% due to a broadly stronger Euro and a recovery in commodity currencies
There was little major economic data or announcements out of the US yesterday. Wholesale inventories dipped marginally in October. The monthly measure declined by 0.1%, suggesting that firms are struggling to work off high inventory levels. A downward revision in the previous month indicated that inventory growth exceeded sales growth in 70% of both durable and non-durable sectors, which does not bode well for final-quarter US economic growth.
Earlier in the day, mortgage applications rose by 1.2%, although the volatile nature of the measure meant that the Dollar was unmoved.
Weekly jobless claims today will be the only major release in the US at 1:30pm in an otherwise quiet day across the pond.
Rest of the world
Commodity currencies rebounded yesterday, following losses earlier in the week. The Norwegian Krone and Colombian Peso both gained, while the Brazilian Real surged by close to 2% on hopes of an impeachment of unpopular President Dilma Rousseff.
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