Sterling
The Pound caught a break yesterday thanks to a surprise split at the Bank of England.
The UK central bank left interest rates on hold and refrained from additional asset purchases, as expected, however, three policymakers broke ranks and voted for higher rates. Five officials voted to leave borrowing costs unchanged. The three dissenting hawks caught markets off-guard as traders had bet that political uncertainty, stagnant wages and slowing GDP growth would outweigh the threat of rising inflation and the depreciating Pound.
Sterling rallied following the statement, but it must be mentioned that investors are not convinced that the BoE actually intends to hike rates anytime soon. Most analysts reckon the hawkish votes were designed to prop-up the Pound, which could subsequently reduce import costs and dampen inflationary pressures.
Euro
The Pound to Euro exchange rate strengthened by around a cent to hit its highest level since last week’s election in response to the three hawkish BoE votes.
Prior to the UK central bank surprise, Sterling had come under pressure in reaction to some disappointing retail sales numbers. The Office for National Statistics reported that sales volumes plunged in the month of May, bringing the annualised index down to a four-year low of 0.9%. Markets interpreted the soft numbers as further sign that declines in real wage growth (earnings not keeping up with inflation) were starting to weigh on consumer spending patterns.
Data this morning is anticipated to show that Eurozone consumer prices decelerated from 1.9% to 1.4% last month. The bearish figure could act as a drag on demand for the single currency, as it would give the already-cautious European Central Bank more justification to be dovish.
US Dollar
‘Cable’ drifted slightly higher yesterday, with Sterling able to recover from initial retail sales related losses following the surprise Bank of England split.
Over in the US traders were treated to some underwhelming factory data, with industrial production slowing from 1.1% to 0.0% and manufacturing activity shrinking from 1.1% to -0.4%. The disappointing results failed to have much of a negative impact on the US Dollar because investors are still betting on additional rate hikes from the Federal Reserve following Wednesday’s rate rise and hawkish message.
Canadian Dollar
Sterling jumped higher by just over half a cent against the Canadian Dollar yesterday as traders were forced to reconsider their projections for Bank of England interest rate policy. Although most investors believe yesterday’s split was designed to shore-up demand for the Pound, and does not necessarily mean UK rates will rise over the next year or so, the surprise hawkish votes have given GBP a boost.
Australian Dollar
The Pound ended the day on top against the Australian Dollar yesterday, thanks to the three BoE votes for higher rates. However, Sterling had initially sustained losses due to some surprisingly upbeat Australian labour market figures. The headline Australian unemployment rate slid from 5.7% to 5.5%, boosted by a sizable 42,000 surge in job creation. The robust report sent the ‘Aussie’ higher by around a cent, but the gains did not last.
New Zealand Dollar
The Sterling to New Zealand Dollar exchange rate soared by around 130 pips yesterday as soft New Zealand GDP numbers weighed on the ‘Kiwi’ and an unexpected surge of BoE rate hike votes bolstered the appeal of the Great British Pound.
Data Released
10:00 EUR Eurozone Consumer Price Index (YoY) (MAY F) Medium 1.4%
15:00 USD U. of Michigan Confidence (JUN P) High 97.0