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Pound retraces gains ahead of Bank of England meeting

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14 September 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling slipped back below the 1.33 mark against the US Dollar ahead of this afternoon’s Bank of England meeting, with policymakers expected to shed more light on the possibility of a sooner-than-expected interest rate hike in the UK.

he UK economy has proved surprisingly resilient in the face of the ongoing uncertainty surrounding the Brexit negotiations. While growth has slowed, investors have brought forward their expectations for Britain’s first rate hike in a decade following the recent sharp increase in inflation. Markets are now pricing in around a 40% chance of a rate increase in the UK before the year is out, a fairly significant jump on the roughly 20% probability priced in a matter of a few weeks ago.

We think there is also now a realistic, albeit slim, possibility that chief economist Andy Haldane could join Ian McCafferty and Michael Saunders in voting for an immediate hike today. In the absence of any vote changes, rhetoric on the sustainability of the inflation bounce could prove the main takeaway from today’s statement, set for release at midday.

Prior to today’s meeting, a slightly weaker-than-expected set of UK labour data on Wednesday caused the Pound to retrace much of its recent gains against a broadly stronger US Dollar. The jobless rate actually surprised to the upside, declining to 4.3% from 4.4% following a 75,000 fall in overall unemployment. This marked its lowest rate since as far back as 1975. However, earnings remained unchanged in the three months to July, continuing to point to a squeeze on UK real incomes. Wage growth excluding bonus came in unchanged at 2.1%, while including bonus undershot expectations, also at 2.1% versus the 2.3% estimate.

Dollar rises as Trump talks up US tax cuts

Donald Trump’s twitter feed kept EUR/USD traders interested on Wednesday in an otherwise fairly quiet session. The Dollar rallied hard following the President’s comment that claimed “with Irma and Harvey devastation, tax cuts and tax reform is needed more than ever before”. In the immediate aftermath of Trump’s election victory in November 2016, the USD rallied hard on expectations of tax cuts to its strongest position in almost fifteen years. However, his inability to push through any sort of meaningful policy changes this year has severed dampened sentiment towards the currency.

Earlier in the day, US producer prices were a slight disappointment, although still rose fairly handsomely, reinforcing the view that stronger inflationary pressures could accelerate the process of policy normalisation by the Federal Reserve. The producer price index increased rather sharply to 2.4% from 1.9%, albeit marginally below consensus. This afternoon’s consumer price index should prove more or a market mover when released at 13:30 UK time. In the absence of any major economic releases out of the Eurozone, developments out of the US are likely to shift the common currency today.