Sterling
The Pound tanked across the board yesterday as investors reacted to what was considered a dovish policy statement from the Bank of England.
Threadneedle Street left policy on hold with a 0.25% benchmark interest rate and a £435 billion asset purchasing target – this much was expected. However, traders had also anticipated a message showing willingness to start raising rates later on in the year, which they did not receive.
Instead, the UK central bank ignored the recent spike in price pressures and stated that CPI was still set to peak at 2.8% in 2018 – a ‘transitional’ figure that Governor Mark Carney has previously suggested the bank was willing to look through. The BoE also adjusted its unemployment equilibrium rate from 5% to 4%-4.75%, which effectively means that policymakers are happy to let the jobless rate (currently 4.8%) drop a lot further before they feel the jobs market constitutes a risk worthy of raising interest rates.
Euro
The Pound to Euro exchange rate tumbled by around -160 pips yesterday following the Bank of England’s ‘Super Thursday’ batch of policy announcements.
BoE Governor Mark Carney stuck to his line from November that the next move in interest rates could be in ‘either direction’ but Carney did significantly upgrade the bank’s 2017 growth forecast to suggest a GDP expansion of 2.0% – up from 1.4% in November and 0.8% in August.
However, the Governor maintained that, despite the improved British growth outlook, Brexit is not without its consequences. Carney argued that ‘uncertainty over future trade is weighing on business investment’ and stated that GDP is still tipped to come in -1.5% lower in two years’ time than if the Remain camp had won.
The cautionary tone of Carney’s press conference, combined with the downward adjustment to the bank’s unemployment equilibrium rate, disappointed the Sterling bulls and demand for the Pound shrank as 2017 rate hike probability futures dropped from 50% to 35%.
US Dollar
‘Cable’ slid by around -130 pips yesterday as the BoE’s lack of appetite for higher interest rates took a heavy toll on the UK currency.
Although the Federal Reserve’s policy announcement on Thursday was also considered neutral-dovish, the US central bank aims to raise rates three times in 2017 while the BoE appears keen to leave borrowing costs unchanged, which explains why the US Dollar was able to recover all of its losses from Wednesday’s session.
There is potential for further GBP/USD dips this afternoon if the January US non-farm payrolls report prints positively. Analysts anticipate a score of 175,000, up from 156,000 in December, but separate labour market indicators suggest the NFP index could surpass those forecasts. This would be liable to send the ‘Greenback’ higher. On the other hand, a disappointing number could easily put the brakes on demand for the US Dollar.
Canadian Dollar
Sterling lost out on two whole cents to the Canadian Dollar yesterday following the BoE’s policy announcement. We could see GBP/CAD recover today if January’s UK service sector report comes in strongly. However, the index is tipped to slow from 56.2 to 55.8 and any steeper falls could have a negative impact on demand for the Pound.
Australian Dollar
The Pound to Australian Dollar exchange rate plunged over three cents yesterday as hopes of a BoE rate hike in 2017 were dashed by a fairly cautionary policy statement from Governor Mark Carney. Prior to the BoE’s communiqué traders had hoped that rising inflation pressures and a sanguine growth outlook would prompt the UK central bank to hold a more open mind to tightening policy later in the year. However, this was not the case and Sterling tumbled as a result.
New Zealand Dollar
Sterling plummeted by around two cents yesterday to complete a thoroughly rotten day for the Pound on the currency markets.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (JAN) Medium 55.8
10:00 EUR Euro-Zone Retail Sales (YoY) (DEC) Medium 1.8%
13:30 USD Change in Non-farm Payrolls (JAN) High 175k
13:30 USD Unemployment Rate (JAN) High 4.7%
15:00 USD ISM Non-Manufacutring Composite (JAN) High 57