Sterling
The Pound weakened again yesterday in response to further dovish comments from the Bank of England.
Policymaker Ian McCafferty, who voted against QE last week, confirmed that the BoE was willing to loosen policy further over the next few months. “If the economy proves to have turned down in line with the initial survey signals, I believe that more easing is likely to be required’, he said.
McCafferty’s comments mirrored those of Governor Mark Carney on Thursday but markets were moved to sell Sterling because McCafferty is seen as one of the more hawkish members of the monetary policy committee (MPC).
Euro
The Pound to Euro exchange rate tumbled over half a cent yesterday to strike its lowest level in a month.
Demand for Sterling was hampered by the dovish BoE McCafferty comments, but also by data showing that the UK trade deficit widened by more-than-expected in June. The visible trade balance deficit, which strips out the effects of the service sector, rose from £11.5 billion to £12.5 billion, confounding expectations of a dip to £10.1 billion. The figure marked the worst June on record and the worst month since March last year.
Analysts noted that because the data was largely compiled pre-‘Brexit’, we still have little idea how UK trade has fared since the historic vote. It is anticipated that the weaker Pound will boost exports and prompt a reduction in imports, however, this process is liable to take years not months and the near-term outlook remains uncertain.
US Dollar
‘Cable’ slid to a monthly low yesterday, hovering between 150-200 pips higher than the three-decade low struck following the ‘Brexit’ vote in June.
It was the dovish BoE outlook, which stands in contrast to the Federal Reserve’s perceived hawkish bias, that stoked the recent surge in GBP/USD sell orders. Demand for Sterling is likely to remain weak for the foreseeable future unless UK economic data surpasses the BoE’s forecasts of 2.0% growth this year and 0.8% next. The UK central bank appears ready to loosen policy further if Britain follows its projected path, which means that if UK GDP underperforms the latest forecasts then the policy response could be even more aggressive than currently anticipated.
The only good news for the Pound yesterday was that UK industrial production beat expectations of a 0.1% decline in June with a positive growth score of 0.1%. This marked the best quarter of factory output since 1999 but any optimism was tempered by the fact that the bulk of the expansion came in April.
Canadian Dollar
Sterling plummeted by around a cent to strike its lowest level in almost a month against the Canadian Dollar yesterday. The Pound was hit by a cocktail of BoE easing bets, widening trade deficit data and a decelerating economy.
The National Institute of Economic and Social Research (NIESR) reported that British growth cooled from 0.6% in the three months to June to 0.3% in the three months to July, indicating that GDP shrank 0.2% during the month of July. The downbeat data set plays into the consensus view that the domestic economy has already weakened markedly since the vote to leave the European Union.
Australian Dollar
The Pound to Australian Dollar exchange rate ticked lower by another 60 pips yesterday to hit a fresh two-and-a-half-year low. Markets were expecting Reserve Bank of Australia Governor Glenn Stevens to strike a neutral tone at a press conference in Sydney.
The RBA recently cut rates to a new record low but the ‘Aussie’ has performed well against Sterling since then due to speculation that the central bank is not keen to embark on a full cycle of monetary easing.
New Zealand Dollar
Sterling fell by around a cent against the New Zealand Dollar yesterday to reach a three-week low despite the fact that investors are primed for a 25 basis point rate reduction this evening from the Reserve Bank of New Zealand.
Data Released
22:00 NZD Reserve Bank of New Zealand Rate Decision (AUG 11) High 2.00%