The EUR/GBP took its sweet time but has now finally reverted back to its mean around the 200-day average circa 0.8750, as we had highlighted the possibility when it was still trading around the 0.92 handle at the end of the summer. Then, we argued that the strength of the euro was becoming a headache for the European Central Bank, which increased the chances of a more gradual exit from the asset purchases programme. As it turned out, the ECB has indeed announced a gradual exit from QE, by tapering the stimulus package by half and simultaneously increasing the duration of the programme by at least another nine months from January 2018. This was a dovish move by the ECB and the euro's response was a swift drop.
The pound has been on an uptrend for much of 2017, led by a weaker dollar in the first half and by expectations of a UK rate rise in the second half. Its high of the year and post Brexit peak of $1.3656 was reached soon after the Bank of England's September policy meeting when MPC members signalled "some withdrawal of monetary stimulus is likely to be appropriate over the coming months".
The pound has started the new week on the front foot after it managed to come off its worst levels against the dollar on Friday. Against the euro, it closed higher for the third straight session on Friday, before extending its gains at the start of today's session. Other GBP crosses were also higher across the board at the time of this writing. The early indications suggest speculators are warming up to sterling, possibly on expectations that the Bank of England will hike interest rates for the first time since before the financial crisis. The BoE may also revise its inflation expectations higher than expected, which may mean another rate hike next year. There's also key UK PMI data to look out for this week, although they will be overshadowed by the BoE's Super Thursday meeting.
After the surprisingly hawkish shift in tone at the latest Bank of England (BoE) meeting in September, we think the BoE is going to hike the Bank Rate by 25bp from 0.25% to 0.50% at its meeting on Thursday (in line with consensus and market pricing). The shift is due to a combination of low unemployment rate and high inflation. We think the vote count is likely to be 7-2, as Sir David Ramsden and Sir Jonathan Cunliffe have indicated that they think it is too early to hike. However, even Gertjan Vlieghe, who was previously considered very dovish, now seems to support a hike and we think most BoE members are inclined to vote with the majority.
The British pound has dropped lower in the Monday session. In North American trade, GBP/USD is trading at 1.3452, down 0.34% on the day. On the release front, the Bank of England released the Financial Policy Committee statement. There are no US economic releases, but there are three FOMC members holding speaking engagements – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.
The British Pound depreciated against the Greenback by 49 base points or 0.36% falling further to touch an intraday low at the 1.3483 mark, after the Bank of England's Governor Mark Carney delivered a speech on Monday.
On Tuesday, the dollar hit a fresh eight-week high against the yen in Asia with investors widely expecting the Fed policymakers to announce the start of monetary tightening later this year in their two-day meeting that concludes on Wednesday. Its British counterpart was in an uptrend as well following a deep fall on Monday after the BOE Governor, Mark Carney, talked down the country’s post-Brexit trade prospects and argued that rates should rise moderately, giving no clues on when the central bank will deliver higher rates.
The markets were trading relatively quiet yesterday with the main events of the day coming from the BoE Governor Carney's comments and the Eurozone inflation data. The British pound was seen trading weaker yesterday on the back of the comments from Carney.
Risk appetite continued to drive US indices to new records higher overnight. DOW gained 63.01 points, or 0.28% to close at 22331.35. S&P 500 rose 3.64 points or 0.15% to 2503.87. Both were at new records. 10 year yield also gained 0.027 to 2.229. Traders continue to raise their bet on a December Fed hike, with over 57% chance as indicated by fed fund futures. But the Dollar is not getting much support yet. Markets will have their eyes on tomorrow's FOMC decision on balance sheet normalization, and the post meeting press conference first. Meanwhile, Sterling and Canadian Dollar are both talked down mildly by respective central bank officials. Yen and also stays weak in risk seeking environment. In other markets, Gold is extending recent pull back and is pressing 1310. WTI crude oil continues to struggle around 50.
In a week which saw risk sentiment improving again following set-backs ahead of hurricane Irma and the imposition of harsher sanctions against North Korea, we also saw the Bank of England (BoE) signal a hiking cycle to begin sooner than we and the market were looking for, and the Swiss National Bank (SNB) emphasising its commitment to accommodative policy. In our view, this served to confirm that central bankers are now divided into largely three camps.
Bank of England decided to keep interest rates and its two asset purchase programs unchanged. However, the pound rallied to a one-year high against the dollar and near to a two-month high versus the euro after the monetary statement revealed that the central bank might raise interest rates sooner than markets anticipate.
As expected, the Bank of England (BoE) maintained the Bank Rate at 0.25% and kept the targets for the government bond purchases and corporate bond purchases at GBP435bn and GBP10bn, respectively. In line with our call, the vote count for the Bank Rate was 7-2, but we were caught by surprise by the warning of a possible forthcoming rate hike 'over coming months' if underlying inflation moves higher and the unemployment rate moves lower.
BOE sent a hawkish message at the September meeting, noting that the majority of the members agreed that some withdrawal of stimulus should be appropriate in coming months. The key reason for the upcoming tightening is strong inflation which the central bank expects to rise above +3% in October. The market interpreted this as a signal that the historically low interest rate would be raised soon. Sterling rallied to a one-year high against the US dollar and a two-month high against the euro after the announcement. The market has now priced in over 54% chance of a rate hike in December. On the monetary policy this month, the BOE voted 7-2 to leave the Bank rate unchanged at 0.25% and unanimously to keep the asset purchase at 435B pound.
The Bank of England threw its name into the hat of central banks that could still raise interest rates this year when released the minutes from its monetary policy meeting today. While traders were initially looking for a change in the voting – which remained at 7-2 in favour of no change – the clues were actually in the minutes, resulting in a sharp u-turn from the initial moves. Traders were anticipating at least one more vote in favour of a rate hike which would have represented a potential shift of power within the MPC but instead it was the minutes that were used to signal a possible hike in the coming months, the result being that sterling's drop was immediately reversed and the currency is now up around 1% on the day against the dollar and the euro.
Investors who were anticipating that soaring inflation in the UK would convert some BoE doves, were left slightly disappointed on Thursday, after the MPC voted 7-2 in favor of keeping the rate unchanged. The initial disappointment triggered a knee-jerk reaction lower on the GBPUSD, before prices rebounded higher, as market players digested the hawkish policy statement. With the central bank stating that it could "reduce stimulus in the coming months" if inflationary pressures continue to mount, Sterling is likely to remain supported this week.
The British Pound surges sharply as markets perceive BoE announcement today as a hawkish ones. There is no surprise from the policy decision, nor the vote split. The key is that BoE now indicated that stimulus exit could start in the coming "months". Swiss Franc stays soft after SNB left interest rates unchanged and sounds less concerned with the exchange rate in the statement. Meanwhile, Dollar is struggling to extend yesterday's tax reform new triggered gain after US President Donald Trump denied a DACA deal with Democrats. That raises the doubt again on whether Trump is working on bipartisan solutions with Democrats which leads to speedy approval of tax reforms.
The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 13 September 2017, the MPC voted by a majority of 7-2 to maintain Bank Rate at 0.25%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
That was not surprising. The SNB did not change its monetary policy this morning. Rates will remain negative at -0.75% and the target range for the 3-month Libor is unchanged at between -1.25% and -0.25%.
Today's Bank of England Monetary Policy Committee (MPC) announcement is the main event of the week. While it is highly unlikely that we willsee an immediate interest rate hike, or a reduction in quantitative easing, the markets' biggest question following the rise in inflation, is whether the central bank will finally provide signals of tightening monetary policy.
The Bank of England faces a dilemma when it meets on Thursday between getting inflation in check and supporting the flagging post-Brexit economy. With the central bank significantly overshooting its 2% inflation target – CPI rose to 2.9% in August – the answer may appear simple but with policy makers divided, that is clearly not the case.
After the UK's Consumer Price Index inflation data for August came out higher than expected on Tuesday, speculation that the Bank of England would be taking on a more hawkish stance during Thursday's monetary policy decision boosted the British pound dramatically against other currencies. On Wednesday, however, the UK's average earnings index (3-month average ending in July, compared to the same period a year earlier) fell short of expectations at 2.1% against a prior consensus forecast of 2.3%. This put somewhat of a damper on the hawkish BoE thesis, prompting the pound to pare some of Tuesday's gains. Despite the lower-than-expected wage growth, however, other aspects of the jobs data beat expectations, including another multi-decade low in the UK unemployment rate and a surprise decrease in unemployment claims for August.
Expectations that the Bank of England will take a more hawkish stance at its policy meeting this week have lifted sterling from two-month lows ploughed at the end of August, offsetting concerns about a slowing economy and a lack of progress in the Brexit negotiations.
The Bank of England faces a dilemma when it meets on Thursday between getting inflation in check and supporting the flagging post-Brexit economy. With the central bank significantly overshooting its 2% inflation target - CPI rose to 2.9% in August - the answer may appear simple but with policy makers divided, that is clearly not the case.
After yesterday's stronger-than-expected CPI print, investors were wondering how UK wages had fared and whether more of the Bank of England's Monetary Policy Committee members would vote for a rate rise on Thursday. We got the answer to one of those questions this morning as wages data disappointed, which actually implies that the BoE is likely to keep interest rates unchanged, most likely in a 7-2 vote, as widely expected. If this turns out to be the case, we may see a pause in the GBP rally after its big upsurge over the past several trading sessions.
We expect the BOE to vote 7-2 to leave the Bank rate unchanged at 0.25% and the asset purchase at 435B pound. Despite overshooting of inflation, most members would remain cautious and cite slow economic growth and Brexit uncertainty as reasons for keeping the monetary policy accommodative. However, the MPC is expected to adopt a more hawkish tone and strengthen the warning of a weak sterling. The new deputy governor Dave Ramsden would be voting for the first time. He is perceived as a dove amidst his warning of dire consequences after Brexit. He is expected to vote to maintain the status quo in the first 9-member MPC meeting since May.
Equity markets rallied back on Monday and safe-haven demand took a downturn as Hurricane Irma abated and North Korea refrained from conducting more missile tests (for the time being). The US dollar found a bit of footing as it rebounded after having dropped to a multi-year low against a basket of other major currencies late last week. Meanwhile, the British pound managed to stay well-supported in the run-up to a week featuring major economic data releases and a key central bank decision from the UK.
Headline CPI in the UK surprisingly stayed unchanged at +2.6% y/y in July, compared with consensus of a renewed pick up to +2.7%. From a month ago, inflation contracted -0.1%, after a flat reading in June. Re-designated by the Statistics Authority on July 31, the consumer price index including owner occupiers' housing (CPIH) steadied at +2.6%. The price of motor fuel continued to fall and contributed to the biggest downward change from June to July. Upward contributions came from a range of goods and services, including clothing, household goods, gas and electricity, and food and non-alcoholic beverages. Core CPI stayed unchanged at +2.4%, missing market expectation of a rise to +2.5%.
As expected, the Bank of England maintained the Bank Rate at 0.25% and kept the targets for the government bond purchases and corporate bond purchases at GBP435bn and GBP10bn, respectively. In line with our call (but against the view of some houses), the vote count for the Bank Rate was 6-2 against 5-3 last time, as Kristin Forbes, a known hawk voting for a hike, has left the committee and it was too early for Andy Haldane to jump camp already despite a more hawkish tone in his latest speech.
The Bank of England decided to keep rates unchanged at all-time lows as it completed its two-day meeting today. Despite the decision not deviating from expectations, sterling suffered sizable losses relative to majors including the dollar and the euro as the Bank lowered its forecasts for growth in the current and following years. The pound's decline continued as Mark Carney, the central bank's Governor, appeared before the press after the decision announcement. Overall, the Bank's decision, minutes and language used in its quarterly Inflation Report lacked the hawkish tone that led to rising market expectations for an interest rate hike to be delivered this year.
The BOE left the Bank rate unchanged at 0.25%, the government bond purchases at 435B pound and corporate bond purchases at 10B pound. As we had anticipated, the members voted 6-2 to leave the interest rate unchanged with the newcomer Silvana Tenreyo supporting to maintain the status quo. Ian McCafferty and Michael Saunders continued to believe a +25 bps rate is needed. Sterling slumped after the announcement as the central bank downgraded the growth and wage forecasts. Governor Mark Carney warned that Brexit uncertainty is weighing on the country's economic outlook.
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