Sterling
The Pound zipped higher against the majors yesterday in response to the Bank of England’s decision to leave rates on hold at the record low of 0.50% through July.
Unlike the electorate, the Monetary Policy Committee is not one to deviate from the status quo. Nevertheless, Governor Mark Carney came out two weeks ago and promised markets summer stimulus in an impromptu communiqué. This prompted a surge in rate cut bets to suggest an 80% chance of the bank lowering borrowing costs at yesterday’s meeting.
However, the Governor kept a cool head – or lived up to his reputation as an ‘unreliable boyfriend’, depending on which way you look at it – and opted to sit back and wait for hard data before responding to the ‘Brexit’ vote with new monetary policy. Sentiment, and indeed the drastic slide in Sterling, suggests that the referendum result has had a negative impact on economic performance but very little concrete data has been captured since June 23. By August 4, however, when the MPC meets again to discuss policy and release new growth and inflation forecasts, there will be more solid evidence available to policymakers when evaluating the impact of the vote.
The BoE’s minutes report showed that ‘most members expected monetary policy to be loosened in August’ but that ‘ the exact extent of any additional stimulus measures would be based on the Committee’s updated forecast’. This suggests that rate cuts and / or additional QE bond-buying can be expected at the beginning of August.
Euro
The Pound to Euro exchange rate jumped higher by almost two cents yesterday following the Bank of England’s surprise decision to leave rates on hold this month.
The move wrong-footed markets, who had heavily positioned themselves for a reduction in borrowing costs, and stoked criticism of Governor Carney that his hot and cold forward guidance suggestions likened him to an ‘unreliable boyfriend’. MP Pat McFadden originally put the slur to Carney back in June 2014.
The dovish minutes report means that traders are now expecting a major shift in policy next month but the reluctance to cut rates this time out means that some analysts are ruling out an August rate cut. Because rates are already at record lows there is an argument that suggests further reductions would only serve to reduce bank profits and would not lead to looser lending conditions or increased investment. It remains to be seen what the bank’s next moves will be but it is entirely likely that GBP/EUR movements will be dictated by BoE sentiment over the next three weeks.
US Dollar
Sterling strengthened by over two cents versus the US Dollar yesterday as investors rushed to adjust their positions following the BoE’s decision to leave rates on hold in July.
The surge means that ‘Cable’ is now around five cents stronger than the 31-year low it hit last week. However, the prospect of additional easing measures in August remains strong and the Pound could easily soften in the run-up to the BoE’s next meeting. Having said this, Governor Carney’s reputation as an ‘unreliable boyfriend’ means nothing should be taken for granted. There remains a small possibility that the UK central bank will refrain from further stimulus next month.
Canadian Dollar
GBP/CAD rose by around 150 pips yesterday following the BoE’s interest rate decision. However, the ‘Loonie’ was buffeted by a rise in oil prices, which appeared to coincide with the BoE’s announcement. This is because the US Dollar, which crude is priced in, softened slightly when Carney held rates, thus making oil a little bit more affordable to foreign buyers.
Australian Dollar
The Pound to Australian Dollar exchange rate rallied by around two cents yesterday. In addition to the BoE decision, Sterling was also able to appreciate against the ‘Aussie’ in response to the latest Australian labour market report, which saw unemployment rise from 5.7% to 5.8%.
New Zealand Dollar
The Pound registered a whopping four-cent gain against the New Zealand Dollar yesterday, bringing GBP/NZD to its highest level in a fortnight.
Data Released
10:00 EUR Euro-Zone Consumer Price Index (YoY) (JUN F) Medium 0.1%
13:30 USD Advance Retail Sales (JUN) High 0.1%
13:30 USD Consumer Price Index (YoY) (JUN) High 1.1%
14:15 USD Industrial Production (JUN) Medium 0.2%