The Bank of England coming closer to an interest rate increase shocked currency market participants today, who reacted by placing long sterling positions and thus boosting the currency. The dollar stood stronger today following a more hawkish than expected Fed.

The Bank of England left rates unchanged at the record-low 0.25% upon completion of today’s meeting. However, three of the eight Monetary Policy Committee (MPC) members on the Bank’s board decided to support a rate hike, taking markets by surprise as expectations were for just one dissident from the consensus view. Governor Mark Carney once again voted in favor of keeping rates at their current level, while MPC members Ian McCafferty and Michael Saunders were the ones joining Kristin Forbes – who backed a rate rise in the past as well – in supporting a rate hike. Forbes’ term on the MPC expires by month end. This brings the BoE the closest to an interest rate increase since the financial crisis started unfolding back in 2007. In terms of reaction in the forex markets, sterling recorded sizeable gains versus other currencies such as the dollar and the euro. Specifically, pound/dollar jumped to eventually reach its daily high of 1.2794 within fifteen minutes of the news hitting the markets. Previously, the pair traded at 1.2693. Euro/pound fell to as low as 0.8722 from 0.8795 before. The pound later gave up part of its gains relative to both currencies.

UK retail sales data negatively surprised as they showed a monthly decline by 1.2% in May. Analysts were expecting a fall by 0.8%, while April’s figure was revised upwards to show a growth in sales of 2.5% from 2.3% before. On an annual basis, sales grew by 0.9%, significantly below projections of 1.7% and April’s respective growth of 4.2% – the result of an upward revision from 4.0%. Excluding fuel, retail sales fell by 1.6% month-on-month in May, worse than the 0.8% fall that was expected and April’s upwardly revised expansion by 2.2%. April’s healthy numbers turned out to be a blip with British consumers now giving a clearer indication that they’re feeling the impact of weak wage growth and rising inflation diminishing their purchasing power. An added layer of political uncertainty surrounding the country following the latest elections could negatively affect consumer sentiment as well. The pound had a muted reaction to the data relative to the dollar and the euro as investors seemed to have waited for the Bank of England’s rate decision to place their sterling bets for the day.

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Out of the US, last week’s jobless claims fell by 8,000 relative to the week before, reaching 237,000. This was also below analyst forecasts projecting the number of claimants to stand at 242,000. Claims have been below 300,000, a level linked to a healthy job market, for 119 consecutive weeks, the longest since 1970. Continued claims, including those that still receive state help after an initial week of benefits, edged slightly higher but remained below 2 million for the ninth week in a row. Dollar/yen rose after the data, but did not manage to post significant gains.

Other US data later in the day pertained to industrial output numbers for the month of May. Output remained flat on a monthly basis, negatively comparing to expectations for a 0.2% growth and April’s upwardly revised 1.1% from 1.0% before. Manufacturing output, a subset of industrial output, also surprised to the downside as it fell by 0.4% month-on-month. This is the second time in three months that manufacturing activity has declined. It is also worrisome that output contraction was broad-based across manufacturing industries, including automobile production. The greenback didn’t react much to the data.

The dollar index, tracking the greenback against the currencies of major US trading partners, posted a rebound today after yesterday’s seven-month low following the not so upbeat inflation and retail sales data. In particular, the index rose to a two-week high of 97.56 and was challenging that level for an even greater gain in late European session trading. The dollar gained positive momentum after the Federal Reserve’s more-hawkish-than-anticipated stance yesterday. The Fed raised rates by a quarter basis point taking the target range for the fed funds rate to between 1.00 and 1.25%. The central bank also signaled that it is on track to raise rates once more this year, while it positively surprised market participants by outlining its plan on reducing the size of its balance sheet. Dollar/yen was last up nine-tenths of a percent at 110.56, while euro/dollar fell to a two-week low of 1.1132 today. It was last down seven-tenths of a percent on the day.

Concluding with a look at gold, the precious metal recorded losses today, falling to a three-week low of $1251.29 an ounce on the back of a stronger dollar.


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