Sterling
The Pound softened yesterday as the relief of Britain finding a new Prime Minister in Theresa May wore off. Traders’ attentions turned to today’s interest rate announcement from the Bank of England, which is expected to see the central bank modify rates for the first time since 2009.
Following a couple of years when it looked almost certain that the next move would be up, the historic ‘Brexit’ vote prompted BoE Governor Mark Carney to come out and promise further stimulus this summer. Ordinarily, the bank would wait to release new inflation forecasts before altering policy but the extraordinary circumstances of the referendum vote mean that policymakers are likely to vote to cut rates today. If this proves to be the case the Pound is likely to suffer further losses.
Euro
The Pound to Euro exchange rate shed around 150 pips yesterday as investors positioned themselves going into today’s potentially momentous BoE interest rate decision.
Markets reckon there is an 80% chance of interest rates being cut from 0.50% to a new all-time low of 0.25% today, meaning that there is scope for further depreciation in Sterling if rates are indeed slashed. If the UK central bank also unleashes another round of bond-buying, or cuts rates by even more than 25 basis points, then there is potential for even more severe Sterling losses. Even if the BoE does not lower rates, any potential GBP/EUR rallies could easily wear thin as next month’s central bank meeting approaches.
In the Eurozone industrial production printed at 0.5%, down from 2.2% and disappointing forecasts of 1.3%. However, the result had very little impact on the currency market because the ‘Brexit’ narrative is considered overwhelmingly more important than any ecostats at this junction.
US Dollar
‘Cable’ tumbled by over a cent yesterday and Sterling could lose more ground today if the Bank of England meets the market consensus and cuts rates by 25 basis points.
The Pound is currently around 250 pips higher than the latest 31-year low struck last week. However, it is entirely possible that we could see GBP/USD slide back to new three-decade lows over the next few weeks if BoE interest rates are slashed at midday today.
The Federal Reserve is in no hurry to raise interest rates post-‘Brexit’ but the prospect of additional easing in the UK combined with the US Dollar’s position as the world’s premier reserve currency means Sterling is liable to devalue further against the ‘Greenback’ in the foreseeable future.
Canadian Dollar
Despite warnings from the Bank of Canada yesterday that growth was likely to come in weaker than initially estimated, the Canadian Dollar rallied by almost three cents against the Pound. The ‘Loonie’ jumped following the BOC statement as investors cheered the central bank’s decision to refrain from cutting borrowing costs at this juncture.
However, the outlook for the ‘Loonie’ looks rocky versus other currencies because the BOC slashed 2016 growth forecasts from 1.7% to 1.3% yesterday and oil prices slid 4% on news that US inventories remain well stocked.
Australian Dollar
Sterling slumped by around two cents against the Australian Dollar yesterday as positive Sterling sentiment wore off ahead of the BoE’s interest rate decision at midday. The Pound had mounted a mini recovery at the start of the week in response to the appointment of Theresa May as Britain’s next Prime Minister. However, the prospect of lower interest rates has largely overshadowed the relief that the UK would have to wait until September to find a new PM.
New Zealand Dollar
Sterling weakened against the New Zealand Dollar yesterday, completing a clean sweep of deprecations against the majors ahead of today’s highly awaited policy announcement from the Bank of England.
Data Released
12:00 GBP Bank of England Rate Decision (JUL 14) High 0.25%
12:00 GBP BOE Asset Purchase Target (JUL) High 375b
13:30 USD Initial Jobless Claims (JUL 9) Medium 265k