Sterling Sinks as Bank of England Hikes Interest Rates but Hints at Policy Stability
So it finally happened: the Bank of England raised interest rates. However, the Pound responded negatively to the BoE announcement.
It seems that Sterling’s recent rallies did not just reflect expectations for Threadneedle Street to raise borrowing costs from 0.25% to 0.50%, but also for the UK central bank to signal that more rate hikes were on the horizon. However, the BoE cautioned that only ‘very gradual’ rises were likely in the coming years, removing talk of markets underpricing the likelihood of tighter policy.
Market futures rates currently point to just two 25 basis point rate hikes between now and 2020 and Governor Mark Carney said that on ‘broad brush’ terms the bank was on the same page as investors.
What next? Well, that’s difficult to predict but considering the Pound took a significant pummeling yesterday there is potential for profit taking to drive Sterling a little higher over the next week or so, especially if today’s UK service sector report comes in higher than the median forecast of 53.3.
Pound to Euro Exchange Rate Slides -200 Pips as Focus Shifts from BoE to Brexit
The Pound to Euro exchange rate lost around -200 pips yesterday as traders reacted negatively to the BoE’s dovish hike, which saw rates rise but expectations of future tightening curbed.
With only 50 basis points worth of rate increases expected over the next three years, Sterling sentiment could shift back towards the Brexit process.
Any signs of progress in the negotiations, especially towards agreeing details on the proposed two-year transition deal could support Sterling, while any setbacks or talk of a no deal scenario could allow the single currency to appreciate.
Pound to US Dollar Exchange Rate Unlikely to Rebound if NFP Report Impresses
‘Cable’ plunged over -200 pips yesterday as markets sold Sterling following the Bank of England’s confirmation that interest rates would only rise at a gradual pace.
The potential for an immediate rebound rests on this afternoon’s US non-farm payroll report. The key labour market indicator is tipped to come in at 312,000 for October, reflecting the give back from September’s -33,000 hurricane related decline.
So long as the NFP figure prints between 200,000-300,000 we are unlikely to see any significant Sterling rallies. However, if the jobs report comes in significantly lower-than-anticipated it could weigh on the US Dollar and allow the Pound to claw back some of its recent losses.
The ‘Greenback’ traded with little sensitivity to US President Donald Trump’s decision to nominate Jerome Powell to replace Janet Yellen as the President of the Federal Reserve.
While Powell is seen as a slightly more hawkish central banker than Yellen, the move was largely priced into the US Dollar exchange rate before the official announcement.
Pound to Canadian Dollar Exchange Rate Falls -250 Pips Following Big BoE Announcement
Reversing a fortnight of strong gains in the run-up to the BoE’s first rate rise in over a decade, the Pound to Canadian Dollar exchange rate suffered losses of around -250 pips yesterday.
We could see a little bit of a rebound in GBP/CAD today, especially if the Canadian unemployment report shows a rise in joblessness. However, traders expect the GBP/CAD rate to remain steady at 6.2% thanks to a mild 15,000 increase in employment.
Pound to Australian Dollar Exchange Rate Down -350 Pips
The Pound to Australian Dollar exchange rate weakened by around -350 pips yesterday to hit its lowest level in a week. The ‘Aussie’ Dollar benefitted from a market-wide downturn in demand for Sterling, while demand for the Antipodean currency remains soft due to shrinking bets on a near-term rate rise from the Reserve Bank of Australia (RBA).
Although the GBP/AUD exchange rate is unlikely to recover yesterday’s steep losses over the weekend, we could see Sterling claim back some pips as profit taking kicks in.
Pound to New Zealand Dollar Exchange Rate Still Strong Despite Significant Daily Losses
GBP/NZD is around 500 pips stronger than it was a fortnight ago, even after Sterling depreciated by around -350 pips during yesterday’s session.
The potential for the Pound to move significantly higher during today’s session rests on the October service sector report. If the UK’s dominant tertiary industries performed stronger-than-anticipated last month then British sentiment would likely improve. On the other hand, a downbeat score could apply further pressure on the Pound.
Data Released Today
09:30 GBP Markit/CIPS UK Services PMI (OCT)
12:30 CAD Net Change in Employment (OCT)
12:30 CAD Unemployment Rate (OCT)
12:30 USD Change in Non-farm Payrolls (OCT)
12:30 USD Unemployment Rate (OCT)