Sterling
The Pound shed around 1% against most of its major currency peers yesterday as rate hike bets plummeted in response to Bank of England Governor Mark Carney’s delayed Mansion House speech.
In an address to the banking community, alongside Chancellor Philip Hammond, Carney said that now was not the time for higher interest rates. Citing ‘anaemic wage growth’, mixed signals on consumer spending and business investment, subdued inflation and Brexit uncertainty, the Governor argued that it was best to remain on the sidelines and wait to see how some of these factors develop.
Some saw the dovish comments as a rebuke to the three policymakers who voted for higher interest rates last week, however, it is conceivable that the voter split was actually planned. The Governor and his rate-setting team could be playing a delicate balancing act.
By putting forward the motion, initially, that rates could rise, the UK central bank sent out a warning shock to consumers: don’t take out more credit than you can afford, borrowing costs will rise one day and we don’t want another lending bubble. The split vote also bolstered the Pound, which could help prevent import costs rising and subsequently dampen inflationary pressures.
However, Carney knows that raising borrowing costs at this juncture could seriously impact business sentiment and could lead to a series of business and consumer defaults. For this reason the Governor chose to make it clear that he did not expect rates to rise just yet.
Euro
The Pound to Euro exchange rate slid by around a cent yesterday following BoE Governor Mark Carney’s cooling of interest rate hike bets.
Prior to Mark Carney’s Mansion House speech, Sterling had actually ticked slightly higher versus the single currency. Chancellor Philip Hammond cheered markets, temporarily, with talk of a softer Brexit involving a transitional deal after the 2019 deadline, a comprehensive agreement for trade and a frictionless customs arrangement. Hammond changed tack from a pre-election desire to strike a hard bargain and urged Britain to avoid a ‘cliff-edge’ Brexit.
The encouraging Brexit news was largely overshadowed by Carney’s dovish assessment of the UK economy, but we could see demand for Sterling pickup over the next few months if the British government continues to move away from the idea that ‘no Brexit deal is better than a bad deal’.
US Dollar
‘Cable’ crashed to a two-month low after a 150-pip depreciation yesterday, as reduced interest rate hike expectations and a warning from Standard & Poor’s weighed on Sterling.
In addition to Carney’s dovish comments, the Pound was also hurt by a statement from credit rating agency S&P suggesting that Britain’s rating could be downgraded before the terms of the Brexit deal are known. S&P slashed the UK’s credit rating two notches from Triple A to AA after the EU referendum last June and a further cut could heap more pressure on the embattled Pound
Canadian Dollar
The Pound to Canadian Dollar exchange rate tumbled 80 pips to strike a fresh two-month low yesterday as the threat of ultra-low interest rates for longer and a credit rating cut weighed heavily over UK assets.
The commodity-correlated ‘Loonie’ was able to rally even though oil, its most-lucrative commodity, slumped to a seven-month low as US supply increased.
Australian Dollar
Sterling also succumbed to a two-month low against the Australian Dollar yesterday, as the shift in UK rate expectations sent traders rushing to sell the Pound.
Down under, the Reserve Bank of Australia maintained a neutral outlook in its latest minutes report, stating that labour and housing data would be watched closely over the coming months. The RBA noted that a rising domestic currency would impact economic growth through exports, but the ‘Aussie’ was not impacted by the remarks, which have been stated often in the past.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate tanked to a three-month low yesterday as investors pulled out of Sterling investments as a triple-threat of Brexit uncertainties, reduced rate hike bets and warnings over the UK’s credit rating compromised the UK currency. Later this evening the Reserve Bank of New Zealand is expected to leave rates on hold at 1.75% but a surprise rate hike, or even a surprisingly hawkish statement, could send GBP/NZD spiralling lower.
Data Released
22:00 NZD Reserve Bank of New Zealand Rate Decision (22 Jun) High 1.75%