Sterling
The Pound settled on Friday following a day of heavy losses on Thursday in reaction to the Bank of England’s new four-pronged stimulus scheme. In addition to cutting rates by 25 basis points, as expected, the UK central bank also boosted the QE bond-buying scheme by £60 billion, allocated £10 billion for corporate bond purchases and created a £100 billion Term Funding Scheme (TFS) to help pass on the reduction in borrowing costs to the real economy. The surprisingly large stimulus package caused UK Gilt yields to strike new record lows, which weighed on Sterling as traders sought larger returns from other investments.
BoE Deputy Governor Ben Broadbent said on Friday that, so long as UK growth does not outperform expectations, he would vote for another rate cut later down the line. However, the remark had little impact on the Pound because the BoE has effectively ruled out the possibility of cutting rates below 0.10%.
Euro
The Pound to Euro exchange rate touched its lowest level in nearly a month on Friday, prompting some analysts to predict further depreciations going forward. The Bank of England’s post-‘Brexit’ stimulus plan has the potential to drag the UK currency lower in the second half of the year – especially so if policymakers vote to enhance the easing package over the next few months.
Dark mutterings from across the channel suggest that the European Central Bank may be planning new stimulus measures of its own in order to stoke inflation, which could prevent the single currency from strengthening too much against the Pound.
US Dollar
‘Cable’ plunged by over a cent to strike a three-week low on Friday afternoon in response to a better-than-anticipated US non-farm payroll report.
Data showed that the US economy added 255,000 new jobs in July, smashing expectations of 180,000. The robust print, accompanied by a 2.6% rise in wage growth and upward revisions to previous reports, gave the ‘Greenback’ a massive boost as analysts re-evaluated the possibility of a rate hike from the Federal Reserve this year. Speculation of further tightening from the Fed had dissipated in the second quarter due to concerns regarding the ‘Brexit’ vote but the impressive July jobs numbers gave the hawks hope on Friday afternoon.
Some forecasters predict a rate rise as soon as September but others reckon the US central bank will not want to unsettle financial markets ahead of the Presidential election in November.
Canadian Dollar
Sterling rallied by around 130 pips on Friday in reaction to a report showing that the Canadian economy lost the most jobs since November in July.
The Canadian unemployment rate rose from 6.8% to 6.9% due to a -31,200 reduction in employment, according to data released by Statistics Canada. Amid signs of slowdown at home, the risk-sensitive ‘Loonie’ was also hurt by the upbeat US jobs numbers, which were seen to increase the likelihood of higher rates south of the border.
Australian Dollar
GBP/AUD touched a new three-week low against the Australian Dollar on Friday but Sterling managed to claw back its losses by the end of the day thanks to the outperforming US labour market report. The risk-correlated ‘Aussie’ declined following the US NFP print, which prompted a rise in Fed rate hike expectations and a sharp dip in risk sentiment. The futures market now shows a 55% chance of a 25 basis point rate rise by December.
New Zealand Dollar
Sterling also managed to rally by around a cent against the New Zealand Dollar as the bullish US NFP print weighed heavily on risk-sensitive currencies like the ‘Kiwi’ Dollar.
Data Released
09:30 EUR Euro-Zone Sentix Investor Confidence (AUG)