Recent UK economic data including yesterday’s Markit/CIPS UK PMI Services survey reinforced expectations that the Bank of England will cut its main interest rate today at 12:00 from 0.50% to 0.25%. Yesterday’s UK PMI Services survey found that Services output and new business both fell at the fastest rates since March 2009.
Chris Williamson, Chief Economist at Markit, which compiles the survey reported that:
“The marked service sector downturn follows news from sister PMI surveys showing construction activity suffering its steepest decline since mid-2009 and manufacturing output contracting at the fastest rate since late-2012. At these levels, the PMI data are collectively signalling a 0.4% quarterly rate of decline of GDP.
It’s too early to say if the surveys will remain in such weak territory in coming months, leaving substantial uncertainty over the extent of any potential downturn. However, the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession.
Services providers are certainly bracing themselves for worse to come, with a record drop in business confidence about the year ahead leaving optimism at its lowest ebb since February 2009.
However, the extent of any downturn clearly depends to some degree on the policy response. The PMI is already deep into territory which would normally spur the Bank of England into taking action to stimulate the economy. A quarter-point cut in interest rates therefore seems to be a foregone conclusion at tomorrow’s Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation.”
Cuts in Central bank interest rates weaken the home currency as investors sell the associated currency to buy higher yielding currencies known as a carry trade.
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The US Dollar (USD) weakened overnight as the Federal Open Market Committee (FOMC) left its key interest rate unchanged at 0.50% and pared the outlook for more rate hikes this year. The market expectation is now that there will likely only be two 0.25% rate hikes this year, down from December’s prediction of four.
Whilst the Federal Reserve acknowledged that the US economy was expanding at a moderate pace, economic projections were downgraded with Real GDP forecast at 2.2% this year down from earlier predictions of 2.4%. The Federal Reserve acknowledged the growing risks of a weakening global economic outlook.
Today the market will focus on interest rate decisions from the Swiss National Bank (SNB) at 08:30, Norges Bank (Central Bank of Norway) at 09:00 and the Bank of England (BoE) at 12:00.
Opinions on what the SNB will do today are divided. There are some expectations that in response to the European Central Bank’s (ECB) easing the SNB might cut the range of its 3 month LIBOR rate to -0.50% and -1.50% from the current -0.25% and -1.25% range. However, as EUR/CHF is held well inside recent range and the ECB have ruled out more rate cuts, the pressure on the SNB to deliver lower rates today is limited so the SNB might opt to hold rates at current levels. Nonetheless, the SNB could have a dovish tone in the accompanying statement. EUR/CHF currently trades @ 1.0990, USD/CHF @ 0.9745 and GBP/CHF @ 1.3920.
The Norges Bank today is forecast to cut its key rate by 0.25% to 0.50% and the rate outlook is also likely to be revised down. EUR/NOK currently trades @ 9.46, USD/NOK @ 8.39 and GBP/NOK @ 11.99.
The Bank of England is expected to hold rates at 0.50% and its asset purchase facility at £375bn. It is unlikely the Bank of England will tighten its monetary policy in advance of the UK referendum on whether Britain should remain in the European Union due June 23rd. The prospect of a possible BREXIT means that the Pound is likely to remain under pressure and prevent any significant gains in the Pound. GBP/USD currently trades @ 1.4273, GBP/EUR @ 1.2660 (0.79p) and GBP/JPY @ 159.32.
Yesterday 05/11 the Pound tumbled in value following the Bank of England’s latest report which downgraded both the UK growth and inflation forecast and subsequently pushed out market expectations of a Bank of England interest rate rise. The Pound fell over 1% against all major currencies with GBP/EUR falling from 1.4199 to 1.3966 and GBP/USD falling from 1.5401 to 1.5203.
This afternoon 06/11 the US Dollar has appreciated strongly, more than 1%, following overwhelmingly strong US employment data. The US Dollar appreciated strongly against the Euro forcing EUR/USD down from an earlier high of 1.0892 to a low of 1.0707. The US Dollar also appreciated against the Pound with GBP/USD falling from 1.5219 to 1.5030. The US Dollar also appreciated against the Swiss Franc with USD/CHF appreciating from 0.9946, through parity to 1.0065. With the US Dollar appreciating more against the Euro than the Pound, GBP/EUR recovered from 1.3896 to 1.4065.
There is lots of global economic data due for release next week and we also have speeches from Bank of England Governor Mark Carney and ECB President Mario Draghi on Wednesday 11/11 which both have the potential to move the market.
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The Pound has strengthened this morning following the release of stronger than expected UK inflation data with Core Consumer Prices rising at an annual pace of 1.2% adding weight to the argument that the Bank of England should consider increasing UK interest rates which have stood at their historic low of 0.50% for more than six years.
This follows recent comments from Bank of England Monetary Policy Committee member Kristin Forbes who argued that “Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect” and comments from MPC member David Miles who said there are arguments for “stating the journey now” towards a rate hike.
An increase in interest rates makes the associated currency more attractive as global investors seek yield in a global economy with historically low interest rates. Both the Federal Reserve in the US and the Bank of England in the UK are now expected to increase rates either late in 2015 or in 2016. Most expectations are for the Federal Reserve to increase rates before the Bank of England with the Bank of England more likely to raise rates in 2016.
The Pound increased to 1.5670 against the US Dollar (from 1.5598 before the inflation data) and increased to 1.4154 against the Euro (from 1.4085 before the inflation data).
The Pound has appreciated following better than expected UK earnings data as earnings increased by 2.7%. Moreover, minutes released by the Bank of England showed that the Bank was unanimous in voting to hold its interest rate at 0.50% and its asset purchase facility at £375bn. Notably the Bank is now expecting UK consumer prices to pick up pace by the end of the year. This has pushed the Pound through 1.57 against the US Dollar and through 1.39 against the Euro.
The European Central Bank (ECB) will start its new government bond-buying programme on 9th March hoping to boost growth and lift inflation in the ailing Eurozone. The ECB plans to spend €60bn a month on buying sovereign bonds and some private sector assets with the purchases likely to last until at least September 2016.
In the UK the Bank of England (BoE) kept rates unchanged, meaning they have now been at their record low of 0.50% for six years. Whist none of the leading economists polled by Reuters expect the Bank of England Monetary Policy Committee to raise rates before the UK general election in May, there are some expectations that the BoE may increase rates sooner than currently forecast by the markets meaning that the ECB and BoE could have diverging monetary policies, thus supporting the Pound further against the Euro.
The Euro (EUR) fell to its lowest level against the US Dollar (USD) in over 11 years hitting a low so far of 1.1008 on the interbank market. The Euro also fell against the Pound (GBP) with EUR/GBP hitting a low of 0.7224 (GBP/EUR high 1.3842).
The Pound has fallen following the release of the latest minutes from the Bank of England as all 9 Monetary Policy Committee members voted to hold UK interest rates at their low of 0.50%. In previous meetings 2 members had voted for an increase in the Bank of England interest rate. These minutes have reinforced recent market expectations that it is now unlikely that the Bank of England will increase interest rates in 2015 making the Pound less attractive.
The Pound fell against the US Dollar from an earlier GBP/USD high of 1.5180 to 1.5077 before recovering back to 1.51 whilst against the Euro the Pound fell from GBP/EUR 1.3125 to 1.3020 before recovering back above 1.3050.
Elsewhere the Euro continues to trade at its lowest level against the US Dollar since 2003 trading in the 1.15s and the Swiss Franc remains strong with EUR/CHF trading near parity at 1.0009 and USD/CHF trading at 0.8650.
The Pound has fallen this morning, most notably against the US Dollar, as UK Consumer Price Index data confirms UK inflation slowed to the least in five years last month at 1.2%, adding pressure on the Bank of England to keep interest rates at record lows for longer. Lower UK interest rates make the Pound less attractive to international investors seeking higher yield. The perception earlier this year that the Bank of England may raise rates in early 2015 had helped the Pound to appreciate to a high of 1.7191 in July against the US Dollar and 1.2875 against the Euro as recently as 1st October. As the market increasingly begins to price out imminent Bank of England rate rises the Pound trades today as low as 1.5948 against the US Dollar and as low as 1.2570 against the Euro.
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The Pound surged higher following Scotland’s decision to remain in the United Kingdom with GBP/EUR hitting a two year high at 1.2802 before falling back to 1.2706 (EUR/GBP 0.7870). GBP/USD soared to a high of 1.6523 before meeting resistance and falling back to 1.6354 and currently trades at 1.6390 in mid-morning UK trading. With the Japanese Yen performing badly this month following the Japanese government’s economic forecast downgrade the Pound hit its highest level against the Japanese Yen since October 2008, pushing GBP/JPY through 180 to a high of 180.70 before falling back to around 178 Yen to the Pound.
With the risk of Scottish independence out of the way the focus now turns back to the strength of the UK economic recovery and the timing of any rate hike from the Bank of England.
The Pound depreciated further today following the release of the Bank’s Quarterly Inflation Report as markets pushed back Bank of England interest rate hike expectations well into 2015. Whilst the Bank revised UK GDP growth forecasts up to 3.5%, they highlighted heightened uncertainty regarding slack in the economy, increased global geo-political risks and the weakness of UK wage growth.
The Pound is currently trading down 0.6% @ 1.6710 against the US Dollar and down 0.75% @ 1.2478 against the Euro.
GBPAUD 1.7937 | GBPCAD 1.8241 | GBPCHF 1.5143 | GBPEUR 1.2478 | GBPJPY 171.03 | GBPUSD 1.6710.
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