Central bank speculation kept the Pound Euro and Pound US Dollar exchange rates on the uptrend yesterday despite domestic warnings over the economy.
Analysts struck a cautious note on the UK economy going forwards, but their words largely failed to curb the optimism caused by recent PMI readings.
Bank of England Signals Policy Easing in November; Pound Exchange Rates Fall
The Pound is on the decline today after the release of the latest Bank of England (BoE) monetary policy meeting. While no changes were made to current policy, the meeting minutes showed that the majority of MPC members were likely to support another cut in November unless the interim data printed particularly above-forecast.
(Last Updated 16.44, 15/09/2016)
Today the Pound is on bearish form ahead of the latest Monetary Policy Committee decision announcement. Considering the strength of recent data, it is unlikely the Bank of England (BoE) will adjust monetary policy this time around. The strength of the latest retail sales data supports this outlook, considering monthly sales fell -0.2% against forecasts of a drop to -0.7%, while yearly sales ticked lower to 6.2% instead of dropping from 6.3% to 5.4% as predicted.
Pound Exchange Rates Post Mild Gains as Labour Market Avoids Brexit Shock
Today’s jobless claims and unemployment rate figures is the first measure of the initial aftermath of the Brexit vote on the jobs market. The results were disappointing, although the Pound initially spiked on trader relief the data wasn’t worse, as a strong Brexit shock had been feared. Gains have softened again marginally as investors realise the data wasn’t overly positive.
The number of people making jobless claims rose 2.4k instead of the forecast 1.8k, while the previous month’s fall in claimants was revised lower, down to -3.6k instead of the initial reading of -8.6k.
(Previously Updated 11.02, 14/09/2016)
The latest UK consumer price index has failed to live up to expectations, showing inflation held steady on previous levels rather than accelerating ten basis points as markets had expected. Core price growth remains at 1.3% year-on-year (YoY), while the non-core index continues to expand at 0.6% YoY.
Economist Ben Brettell said of the data; ‘It is clear businesses importing materials from abroad are facing significantly higher costs. These companies must choose whether to absorb the increase or pass it on to consumers. Assuming at least some will choose the latter route, this could lead to higher consumer prices down the line.’
While some observers have claimed that this is another sign the UK economy has avoided the forewarned Brexit shock, the fact that GBP EUR and GBP USD exchange rates have tumbled suggests markets are more inclined to believe the economists warning inflation is still likely to spike, sooner or later.
Sterling plunged over -1% against many of its currency peers thanks to the weak data suggesting to the markets that loose stimulus from the Bank of England (BoE) is likely to remain for some time. Many in the markets had hoped the initial policy action in response to the Brexit would be used to curb the initial volatility, before rates were returned to their pre-Brexit levels. This is highly unlikely if inflation is not yet showing the increased upwards pressures from weak Pound Sterling.
(Previously Updated 16.28, 13/09/2016)
US Dollar (USD) Recovering after Slump as Fed’s Brainard Weakens Rate Hike Bets
Odds of an interest rate hike this month from the Federal Reserve took a hit yesterday after the Fed’s Lael Brainard remained cautious on the US economic outlook. Markets had eagerly awaited Brainard’s speech – if the most dovish member of the Fed was optimistic that would have strongly suggested monetary tightening next week – but were disappointed by warnings about the Chinese economy and the below-target rate of consumer price growth in the US. Odds of a September hike have fallen dramatically, although bets on December have edged slightly higher.
The US Dollar is advancing versus the Pound and the Euro.
Pound Sterling (GBP) Advances, Ignoring Warnings about UK Economic Growth
Although there were several warnings about the state of the UK economy following the Brexit vote, the Pound was on the uptrend virtually across the board yesterday.
The British Chambers of Commerce (BCC) released forecasts showing anticipated economic growth of 1.8% in 2016 and 1% in 2017. These replaced earlier estimates of 2.2% and 2.3%, respectively.
Meanwhile, Standard & Poors’ suggested that signs of a post-Brexit referendum recovery could be a ‘mirage’, with S&P Global Ratings economist Sophie Tahiri stating;
‘While the news is encouraging, we believe it has no bearing on the cloudy longer-term outlook for the UK economy.’
Eurozone Bond Sell-Off Prompts Investors to Turn to Euro
Investors were buying into the common currency yesterday, although the Euro weakened verses other safe-haven tenders such as the Swiss Franc (CHF) and the Japanese Yen (JPY).
Appreciation in the Euro was caused by a rout in the bond markets; investors were selling bonds after learning that the European Central Bank (ECB) had not discussed quantitative easing at all during the latest policy meeting.
Concerns this meant the programme would be scaled back prompted the sell-off; without strong demand from the ECB to push bond prices higher, investors had little incentive to hold on to the negatively-yielding investments. Instead, they turned to the Euro.
Lockhart Curbs Accelerating Fed Hike Bets, Leaving US Dollar Uncertain
The US Dollar seesawed yesterday on the back of changing bets of an interest rate hike in December.
Last week saw comments from several Federal Reserve officials boost hopes of monetary tightening before the end of the year. Not only did they suggest the economy was strong enough to handle higher borrowing costs, they also highlighted the risks of leaving interest rates at their current low levels.
However, yesterday was the turn of Dennis Lockhart to speak. The Atlanta Fed President was more cautious, explaining;
‘I don’t feel that we are incurring costs of patience that put a lot of urgency on the question of raising rates. It is much more the committee deciding what is the right calibration of the policy rate to the state of the economy and the outlook.’
GBP, EUR, USD Exchange Rate Forecast; Will UK Price Growth Overshoot Estimates?
UK CPI figures are due for release today and are expected to show a ten basis point increase in inflation for both the core and non-core indices.
Eurozone ZEW survey results are released later. The key Eurozone economic sentiment index is expected to rise from 4.6 to 6.7.
The US data docket is significantly lighter, offering the NFIB small business optimism survey results, with a marginal increase in outlook from 94.6 to 94.8 predicted.
GBP, EUR, USD Exchange Rates
The Pound to Euro (GBP EUR) exchange rate was trending in the region of 1.1850, while the Euro Pound (EUR GBP) exchange rate traded around 0.8436 during yesterday’s European session.
The Pound US Dollar (GBP USD) exchange rate was trending around 1.3310, while the US Dollar Pound (USD GBP) exchange rate traded around 0.7513.