Sterling shines following hawkish Bank of England minutes

Enrique Díaz-Álvarez27/Apr/2015Currency Updates

The Pound was without doubt the star of last week trading in world markets. It was by far the best performer of all G10 currencies, rising by almost 2% against the Dollar to end comfortably above the 1.50 mark. The outperformance was driven by a subtle hint slipped into the Minutes for the April meeting that markets were not pricing in sufficiently the chances of an early 2016 hike.

More baffling was the rally in the common currency, in spite of less-than-positive noises coming from the Eurogroup meeting regarding the new Greek program, as well as negative macroeconomic news from the PMI business sentiment surveys. The US Dollar lost ground against every G10 currency save the New Zealand Dollar, where the central bank hinted that it would resort to rate cuts if needed in its desperate quest to weaken the currency.


Currency markets continue to aggressively ignore the news around the upcoming UK election, and are focused instead on the likely future path of monetary policy.

It was unsurprising that the Bank of England’s (BoE) minutes of the April meeting, published last week, triggered a splendid rally in the Pound. This seemingly innocuous sentence was slipped in: The path of Bank Rate expected by financial markets was now exceptionally flat. The MPC is indirectly telling markets that they have got the likely timing of BoE hikes wrong; this is both unusual and meaningful, and currency markets reacted very positively. We have been calling for a Q1 2016 hike for quite some time, and therefore welcome the MPC’s validation of our view.


Last week we saw the first disappointing macroeconomic news from the Eurozone in a while, after a few months of positive surprises. The best leading indicators of economic growth, the PMI business sentiment indices, both fell; the composite index was down 0.5 to 53.5, a level still consistent with steady growth. The negative surprise reflected weaker numbers out of Germany and France; the periphery is still going strong.

One month does not a trend make. However, the MPI composite index also fell from the 54 level back in the spring of last year, and a general Eurozone slowdown followed. We are not changing our forecast of an acceleration to 2% growth in the Eurozone yet, but it is important that we see increases in these key indicators soon.

The Euro mostly ignored these negative news, as well as the tumultuous meeting between the Eurogroup and Greek officials on Friday, and posted a second weekly increase in a row, closing above the 1.08 level and squarely in the middle of the recent range of 1.05 – 1.10 against the US Dollar.


More mixed data last week out of the US failed to resolve the key question: is the slowdown we saw in January and February simply a result of the unusually harsh winter, or are there deeper factors at work?

Durable goods orders increased a sharp 4% in March but, excluding the volatile transportation category, they posted their sixth consecutive monthly fall. However, the 4-week average of weekly unemployment claims, possibly the most accurate high-frequency measure of the health of the labour market, is well below the March level, boding well for the April employment report. Further, housing market numbers all took a sharp turn for the better.

In all, we still think that recent weakness is mostly weather related and continue to expect a growth acceleration into the early summer months.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.