Headlines
Sterling rises on BoE minutes –
China not sufficient to alter policy outlook yet.
UK rates on hold at 0.50% –
MPC votes 8-1 against hike in September.
GBP/USD rallies 100 pips –
Fed still tipped to hike ahead of BoE.
Pound up vs. ‘Kiwi’ –
As dovish RBNZ weighs.
Sterling
Sterling performed well yesterday as the Bank of England delivered a fairly upbeat policy statement, despite swelling headwinds in China.
The BoE followed the script and left interest rates unchanged at 0.50% for the 78th month in a row with only one MPC member voting for a rate rise at this time. However, the minutes report revealed that although the recent meltdown in Chinese equity markets was a serious concern the impacts of the Chinese crisis ‘do not as yet appear sufficient to alter materially the central bank outlook described in the August report’.
The hawks were placated by positive remarks regarding ‘robust real income growth, supportive credit conditions, elevated business and consumer confidence’ and falling unemployment. But the doves were alerted to the use of the term ‘China’ ten times in the report, which suggests that the slowdown in Asia could yet weigh on rate projections over the next few months.
Euro
The Pound rose against the Euro yesterday in response to the more optimistic than expected BoE minutes report. However, Sterling’s gains were not rampant because a large group of analysts still expect the UK central bank to wait around a year to begin tightening monetary policy.
Although the Greek situation is far from being resolved – the threat of political instability surrounding the upcoming snap elections could potentially derail the current bailout agreement – the BoE commented that the direct threat of a ‘Grexit’ was greatly reduced as compared to earlier in the year. This was described as a positive step towards an economic environment suitable for tighter policy. However, the emergence of China as a key concern softened the BoE’s outlook and subsequently prevented GBP/EUR from mounting a significant rally.
US Dollar
The Bank of England’s surprisingly hawkish stance drove ‘Cable’ higher by over 100 pips yesterday, which took Sterling to a fortnightly high against the US Dollar.
The majority of market analysts still anticipate a rate rise from the Federal Reserve well ahead of the BoE but there are a growing number of speculators who reckon the two central banks will act in relative unison. The proposed scenario is that the Fed will hike in December and the BoE will raise rates a few months later in the first quarter of 2016.
In the United States yesterday it was reported that jobless claims rose by 275,000 as expected and that wholesale inventories shrunk -0.1%, which disappointed forecasts of a +0.3% expansion. The result gave the ‘Greenback’ a mildly dovish tint in the eyes of investors.
Canadian Dollar
The Canadian Dollar was forced to give back the majority of the 100-pip gains it picked up on Wednesday.
GBP/CAD plunged on Wednesday when the Bank of Canada opted to leave rates on hold and indicated that it was happy with the current level of stimulus despite enhanced volatility in commodity markets stemming from China. But Sterling clawed back most of those losses yesterday as BoE officials also shrugged off the Chinese crisis and hinted that interest rates could begin to rise around the turn of the year.
In China it was reported that the new housing price index increased by 1.3% in July, which supported the BoC’s decision not to spur lending by reducing interest rates further at this junction.
Australian Dollar
Decent labour market data in Australia insulated the ‘Aussie’ Dollar from any meaningful losses against the Pound yesterday.
The headline unemployment rate dipped from 6.3% to 6.2% thanks to a 17,400 rise in the number of people in work, of which 11,500 were full-time positions. The upbeat jobs figures combined with speculation that Chinese and Japanese officials are preparing to launch fresh stimulus schemes to protect the Australian Dollar from losing out when the surprisingly positive BoE minutes report was released.
Sterling pushed further ahead against the New Zealand Dollar yesterday as markets continued to digest the recent policy communications from the Reserve Bank of New Zealand. As well as slashing the benchmark interest rate -25 basis points for the third meeting on the trot – something the RBNZ has not done since the beginning of the financial crisis in 2008 – the NZ central bank posited that it was ready to cut rates further in the future if the impact of volatility in China proves more damaging than initially estimated.
The Pound to New Zealand Dollar exchange rate rose by around 500 pips in the immediate aftermath of the RBNZ announcement and then by another 100 pips following the release of the latest BoE minutes report.
Data Released Today
09:30 GBP BoE/GfK Inflation Next 12 Mths (AUG) High 2.2%
15:00 USD U. of Michigan Confidence (SEP P) High 91.2