Updated: First Rate Hike in 10 Years Leaves Pound Plummeting
After showing impressive pluck over the last few weeks, the Pound plummeted from its multi-week highs against the US Dollar and multi-month highs against the Euro, Australian Dollar and New Zealand Dollar in the wake of the Bank of England’s (BoE) rate decision.
At the gathering the MPC voted 7-2 in favour of an immediate rate hike, taking borrowing costs from 0.25% to 0.5%, but indicated that further adjustments would be at ‘a gradual pace and to a limited extent’.
The caution saw Sterling lose over 1% against all the major currencies and fall from its recent multi-month highs.
While some were glad that the BoE actually delivered a rate hike after all its recent hints, others fear that the move may be premature.
TorFX Head of Trading Adam Solomon said of the decision; ‘The Pound has weakened 1.5% in value against the Euro since yesterday’s high, after the Bank pressed ahead with the rate hike but Carney delivered a cautious outlook for the economy in the months ahead. This could be a “one and done” scenario, meaning a token rate hike to control inflation and boost the Pound will not be enough to sustain an advance towards the yearly highs. As Carney eluded to today, everything is riding on a Brexit deal.’
Will the Bank of England Raise Rates for the First Time in a Decade? Will Pound (GBP) Exchange Rates Strengthen?
It’s been more than 3,750 days since the Bank of England last raised interest rates. It happened in July 2007, 10 days after Tony Blair left office. A lot has changed since then but markets believe that today is the day that Threadneedle Street will once again tighten monetary policy.
Considering how cemented BoE rate expectations are, and how much the Pound has rallied over the past few weeks, it’s crucial for Sterling that interest rates are raised.
If Governor Mark Carney lives up to his unwanted nickname of the ‘unreliable boyfriend’ by not pulling the trigger at this juncture, it could lead to material losses for the Pound across the board.
Indeed, even the expected 25 basis point hike could spell trouble for Sterling if the accompanying statement does not leave the door open to future tightening.
However, if the UK central bank raises rates and suggests that further increases are on the cards in 2018 then we could see Sterling spike versus the majors.
Pound to Euro Exchange Rate Strikes 4-Month High Ahead of BoE Announcement
The Pound to Euro exchange rate rose to its highest level for four months yesterday following upbeat UK factory data in the morning.
The latest manufacturing PMI report saw the headline index rise unexpectedly from an upwardly revised 56.0 to 56.3. Analysts had anticipated a lower score of 55.9.
A surge in new orders helped drive the sector past its long-running average, while sturdy scores for production and export growth also contributed. The robust print was seen to cement BoE rate hike expectations.
If the BoE opts to raise rates and hint at further tightening then it would likely open the door to another 150 pips worth of potential gains in the coming weeks, while a disappointing UK central bank announcement could drive GBP/EUR lower by up to 200 pips.
Pound to US Dollar Exchange Rate Flat as Fed Leaves Door Open to December Hike
The Pound to US Dollar exchange rate softened minimally yesterday as traders positioned themselves ahead of today’s BoE interest rate decision.
The Federal Reserve left rates on hold yesterday, as was widely expected, but struck a hawkish tone on economic growth and future inflation prospects.
The market reaction to the Fed statement was muted, with analysts in agreement that the US central bank still intends to hike rates in December. So no change in policy outlook and no change in demand for the US Dollar.
We could see moves during today’s session when US President Donald Trump names his nominee for the next Fed President. However, speculation that Trump plans to put forward Jerome Powell failed to move markets yesterday evening.
Pound to Canadian Dollar Exchange Rate Hits New 4-Month High
Sterling struck a new four-month high versus the Canadian Dollar yesterday as UK factory output outpaced its Canadian equivalent. However, GBP/CAD gave back its gains by the end of the London session as profit taking kicked in.
The Canadian manufacturing PMI decelerated from 55.0 to 54.3 in October, it was reported yesterday, which was markedly softer than the UK PMI print of 56.3. Volatility is expected in GBP/CAD around the time of the Bank of England’s policy announcement and quarterly inflation report.
Pound to Australian Dollar Exchange Rate Could Rally on BoE Rate Hike
Having registered a series of multi-month highs in the run-up to today’s BoE rate announcement, the GBP/AUD exchange rate found itself giving back some of its recent gains yesterday afternoon.
Jittery traders pulled out of Sterling, meaning that there is certainly scope for gains if the BoE pulls through on its recent hawkish rhetoric and tightens policy for the first time in a decade.
Scope in Pound to New Zealand Dollar Exchange Rate for Multi-month Highs
The Pound to New Zealand Dollar exchange rate traded relatively flatly yesterday, having had the wind taken out of its sails by Tuesday evening’s solid New Zealand unemployment report.
With joblessness running at its lowest level since 2008 (4.6%) the ‘Kiwi’ Dollar was able to catch a bid following days of turmoil that followed the nation’s general election.
However, GBP/NZD could easily test new 16-month highs if the BoE provides traders with the ammunition to continue pricing in higher interest rates in the UK.
Data Released Today
09:30 GBP Markit/CIPS UK Construction PMI (OCT)
12:00 GBP Bank of England Bank Rate (NOV 02)
12:00 GBP BOE Asset Purchase Target (NOV)
12:00 GBP Bank of England Inflation Report
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