Sterling
The Pound lost ground against the majors yesterday as markets reacted with disappointment to the Bank of England’s ‘Super Thursday’ announcements.
The BoE actually struck a fairly upbeat tone, raising near-term inflation forecasts and hinting that rates would need to rise faster than markets currently project if the Brexit process goes smoothly. Despite this, demand for Sterling dipped. This is most likely because only one policymaker voted for higher rates at the latest meeting. Back in March Kristin Forbes wrong-footed traders with a hawkish vote and dark mutterings had suggested that Michael Saunders and Ian McCafferty were considering voting for higher rates in May.
In addition to the news that the monetary policy committee only contained one hawk, Sterling was also troubled by data showing that annualised industrial production slowed from 2.5% to 1.4% in March and that Britain’s monthly trade deficit rose from £2.6 billion to £4.9 billion that month.
Euro
The Pound to Euro exchange rate declined by around half a cent yesterday as traders reduced their bets of a near-term rate hike from the BoE.
UK policymakers predicted that domestic growth would hit 1.9% in 2017, a teeny bit lower than February’s prediction of 2.0%, while 2017 inflation expectations were upgraded from 2.4% to 2.7%. Any positive sentiment from the inflation upgrade, however, was undermined by a reduction from 3.0% to 2.0% in wage growth projections.
The overarching message that currency traders took from the BoE announcement was that interest rates are unlikely to rise until 2019 – and only then if the upcoming Brexit negotiations run smoothly. This reduced demand for the Pound and could push GBP/EUR lower over the coming days and weeks.
US Dollar
‘Cable’ suffered losses of around 70 pips yesterday as investors concluded that BoE policymakers were unlikely to start tightening policy anytime soon.
The moderately upbeat sentiments from Governor Mark Carney failed to lift the Pound because markets had been hoping for concrete news of a potential rate rise in the form of another hawkish vote. Instead bank officials voted 7-1 against raising borrowing costs and 2019 was cited as the most likely time that rates would begin to rise. The news appears to have halted GBP/USD’s bullish run, and we could now see a little bit of consolidation as traders move out of Sterling positions to reflect the lessened chance of higher yields.
Indeed, the US Dollar could push ahead this afternoon if US inflation data shows that price pressures remained above target in April. The market consensus suggests US CPI ran at 2.3% last month.
Canadian Dollar
The Canadian Dollar rallied by a further 50 pips versus the Pound yesterday, having put in a decent performance on Wednesday when falling US crude inventories pushed oil prices higher.
Ratings agency Moody’s recently cut the credit rating for six of Canada’s largest banks, which tempered the ‘Loonie’s’ gains. However, GBP/CAD lost ground again following the BoE’s May policy report.
Australian Dollar
The Pound to Australian Dollar exchange rate tumbled by around a cent-and-a-half yesterday as markets poured back into the higher-yielding ‘Aussie’ Dollar following statements from the BoE suggesting that British interest rates will remain at rock-bottom levels for another two years.
New Zealand Dollar
Although Sterling drifted lower versus the New Zealand Dollar following the BoE’s ‘Super Thursday’ set of policy announcements, GBP/NZD remains at elevated levels. The ‘Kiwi’ Dollar skidded lower late on Wednesday evening when the Reserve Bank of New Zealand left rates on hold and predicted that borrowing costs would not be hiked in the immediate future.
Data Released
13:30 USD Consumer Price Index (YoY) (APR) High 2.3%
13:30 USD Advance Retail Sales (APR) High 0.6%
15:00 USD U. of Michigan Confidence (MAY P) High 97