Headlines
• BoE strikes dovish tone –
Sterling plummets on delayed rate hike bets.
• GBP/EUR falls from 2.5-month high –
Pound loses -100 pips.
• US Dollar rallies ahead of NFP –
Markets primed for 180,000 print.
• ‘Kiwi’ Dollar gains over 350 pips –
Pound loses out vs. all majors.
Sterling
The Pound plummeted against all of its major currency peers yesterday in response to a surprisingly dovish quarterly inflation report and cautionary minutes from the Bank of England.
The bank surprised nobody by leaving rates on hold at 0.50% for the 80th month in a row but traders were shocked by the dovish tone of the report, which appeared to suggest that interest rates will not rise until the beginning of 2017. The monetary policy committee adjusted its inflation projections to suggest that consumer prices will not rise above 1% until the final quarter of 2016 and the bank realigned its interest rate projections with market forecasts to suggest that rates will not rise until the first quarter of 2017.
During a press conference after the minutes report and inflation report were realesed Governor Mark Carney responded to a grilling from journalists, who questioned his credibility after his U-turn on comments made in August suggesting that the decision on when to raise rates would come into ‘sharper relief’ at the turn of the year, by pointing to unexpected developments in global markets that have softened Britain’s economic outlook. The market meltdown in China and its subsequent impact on global commodity prices was cited as the primary driver behind the monetary policy committee’s decision to push back rate hike expectations.
Euro
Sterling shrunk by over a cent against the Euro yesterday as demand for the UK tender was hampered by the surprisingly dovish stance of the Bank of England in its latest public communications package.
Traders had hoped that the so-called ‘Super Thursday’ and its smattering of central bank speak would provide markets with a clearer indication of when the bank intends to raise rates. Some analysts even expected the Governor to give an explicit nod towards a rate hike in the first half of 2016 à la Federal Reserve President Janet Yellen’s hint that a December rate hike is on the cards earlier on this week. However, the BoE reports and Mark Carney’s press conference were decidedly dovish and the market reaction was clear: sell the Pound.
US Dollar
The Pound to US Dollar exchange rate slid by around -130 pips yesterday afternoon as markets pushed back their BoE rate hike bets even further on the back of a dovish set of statements from the UK central bank.
In contrast to the Federal Reserve, which indicated earlier this week that a rate hike could come as soon as December, the BoE looks poised to remain on the sidelines until the second half of next year. Although the bank’s forecasts point towards higher rates at the beginning of 2017 the Governor commented that it would be ‘prudent’ to think that interest rates will rise at some point in 2016.
GBP/USD struck a three-week low yesterday and Sterling’s losses could be amplified this afternoon if the key US non-farm payroll report prints positively. Markets are primed for a score of 180,000, up from 142,000 previously, and the likelihood is that anything north of 150,000 will be seen as sturdy enough to keep December rate hike bets alive.
Canadian Dollar
Sterling shrunk by a whopping -200 pips against the Canadian Dollar yesterday as the UK’s Canadian central banker Mark Carney talked down the prospects of a near-term interest rate hike from the Bank of England. Carney’s cautious comments wrong-footed markets who had anticipated a more hawkish statement from the BoE and subsequently demand for the Pound sharply declined.
This afternoon’s Canadian unemployment report is predicted to show that joblessness remained at 7.1% in October but any upward or downward deviations could lead to volatility in the value of the ‘Loonie’.
Australian Dollar
The Pound to Australian Dollar exchange weakened by around -230 pips yesterday as the trend of sinking Sterling exchange rates extended to the Antipodean region.
However, there is potential for the Pound to claw back some of its losses later on today if US data points towards a rate hike in December. Any score above 200,000 in the US NFP report is likely to give Fed tightening bets a significant boost and this could easily lead to a lessening of demand for the risk-sensitive ‘Aussie’.
New Zealand Dollar
Sterling’s biggest losses yesterday came against the New Zealand Dollar with GBP/NZD shedding over -350 pips following the Bank of England’s dovish announcements on monetary policy. The high-beta ‘Kiwi’ Dollar is one of the most volatile major currencies, which explains why movements in GBP/NZD were more extreme than in other Sterling pairs.
Data Released Today
09:30 GBP Industrial Production (YoY) (SEP) Medium 1.3%
09:30 GBP Visible Trade Balance (Pounds) (SEP) Medium -£10600
13:30 USD Change in Non-farm Payrolls (OCT) High 180k
13:30 USD Unemployment Rate (OCT) High 5.1%
13:30 USD Average Hourly Earnings (YoY) (OCT) Medium 2.3%
13:30 CAD Unemployment Rate (OCT) High 7.1%
13:30 CAD Net Change in Employment (OCT) High 10.0k