Pound Sterling Stutters as BoE Signals No Upgrade to Rate Outlook, Brexit Trade Talks in Focus
Pound Sterling (GBP) exchange rates failed to catch a strong bid yesterday as the Bank of England (BoE) left interest rates on hold and signalled that borrowing costs would only rise at a gradual pace over the next few years.
The BoE noted that progress in the Brexit talks ‘would reduce the likelihood of a disorderly exit’ but concluded that the economic outlook had not changed significantly from the November inflation report.
This was seen to suggest that despite near-six-year high inflation, a slight uptick in average earnings and a breakthrough in the government’s Brexit negotiations, policymakers were not considering hiking rates again anytime soon.
The Pound slipped immediately after the central bank statement, however, Sterling recovered the majority of its losses within a few hours.
However, GBP exchange rates could climb later today if the EU gives the green light to Brexit negotiations moving on to trade talks.
Pound to Euro (GBP/EUR) Exchange Rate Rallies on Dovish ECB
The Pound to Euro (GBP/EUR) exchange rate rallied by over half a cent yesterday following the European Central Bank’s policy statement.
Sterling dipped mildly following the BoE report, but during the ECB statement it was the single currency’s turn to depreciate.
Traders appeared to react negatively to comments suggesting that inflation in the currency bloc would not hit the 2.0% target until after 2020.
ECB President Mario Draghi said that officials hadn’t discussed whether the bank would continue purchasing Eurozone assets past September 2018. But, with inflation forecast to remain stubbornly below target, investors now believe there is a relatively strong prospect of additional stimulus and this weighed on demand for the Euro.
With inflation forecasts so weak, the single currency found no solace in the ECB’s decision to upgrade its GDP forecasts. The 2017 growth estimate was upped from 2.2% to 2.4%, while 2018 was revised from 1.8% to 2.3%.
Pound to US Dollar (GBP/USD) Exchange Rate Flat as UK and US Retail Sales Surge
The GBP/USD exchange rate held relatively firm yesterday. Both the Pound and the US Dollar were beneficiaries of decent retail sales reports, with UK sales printing at 1.5%, compared to expectations of 0.2%, and US volumes hitting 0.8% compared to forecasts of 0.3%.
Although the Federal Reserve opted against updating its forecasts for three rate hikes in 2018 earlier this week, it is entirely possible that we could see the US central bank tighten policy more aggressively than that when Fed Chair Janet Yellen passes the baton to Jerome Powell.
Many analysts believe that Yellen did not want to rock the boat by predicting additional tightening, seeing as she will not be the one steering the ship through 2018.
This leaves the possibility for further ‘Greenback’ gains in the medium-term. But the more immediate GBP/USD outlook could feature Sterling appreciation.
Pound to Canadian Dollar (GBP/CAD) Exchange Rate Softens Following BoC Governor Poloz Speech
The Pound to Canadian Dollar (GBP/CAD) exchange rate tumbled following a speech from Bank of Canada Governor Stephen Poloz.
Traders had feared that Poloz’ statement would feature concerns relating to the outlook for monetary policy, but in fact the Governor focussed on house prices, jobs for young people and digital currencies such as Bitcoin.
While legitimate issues, the ‘three things that keep Poloz up at night’ were not deemed to have an immediate dampening effect on BoC interest rate expectations.
Pound to Australian Dollar (GBP/AUD) Exchange Rate Sinks on Australian Jobs Figures
Sterling skidded by around half a cent versus the Australian Dollar yesterday, largely thanks to renewed strength in the Australian labour market.
Antipodean traders responded positively to news that unemployment held firm at 5.4% in November, with a bumper 61,600 jump in job creation. The upbeat labour report helped send the ‘Aussie’ to a fortnightly high versus the Pound.
Pound to New Zealand Dollar (GBP/NZD) Exchange Rate Leaps 100 Pips on New Zealand Budget Concerns
The Pound to New Zealand Dollar exchange rate rallied by around a cent yesterday as investors found little bullish signs in the New Zealand coalition government’s first budget.
Although the budget featured pro-growth spending policies and housing investment, traders were concerned with legislation preventing foreign investors from purchasing homes in New Zealand. Markets noted that other such policies related to trade and foreign investment could be implemented in the future and this weighed on demand for the ‘Kiwi’.