Sterling recovers after hawkish comments from BoE’s Forbes

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8 February 2017

Matthew Ryan

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

The Pound had a very mixed day on Tuesday. The UK currency slumped as markets opened for the day, with broad US Dollar strength, following its fourth consecutive weekly fall leading to a sell-off in a host of major currencies.

H
owever, Sterling staged an impressive recovery during afternoon trading off the back of fairly hawkish comments from Bank of England member and senior rate-setter Kristin Forbes. Forbes, known for being one of the slightly more hawkish members of the bank’s monetary policy committee, claimed that interest rates in the UK should rise soon if the British economy continues to grow at a solid pace and if inflation remains on its upward trend.

Meanwhile, the Euro fell to its weakest position in a little over a week despite Federal Reserve member Neel Kaskari suggested that the Fed should keep its monetary policy accommodative. This followed the release of a fairly dire set of industrial production numbers out of Germany that showed output in the sector slumped by 3% in December, marking its largest monthly fall in eight years.

Protectionist trade policies under the Donald Trump administration and possible complications with Britain’s exit from the European Union are expected to weigh on sentiment in Germany this year. Europe’s largest economy will go to the polls in its own National Election in September.

There are no significant economic announcements among the major economies today, with attention remaining firmly on political events. The Reserve Bank of New Zealand will, however, be announcing its interest rate decision this evening. We think the RBNZ will keep rates on hold, while keeping the door open to additional cuts this year amid comfortably below target inflation.

Major currencies in detail

GBP

Sterling ended an eventful London trading session 0.2% higher on Tuesday, buoyed by hawkish comments from Kristin Forbes.

Speaking in published remarks on Tuesday, Forbes suggested the BoE should be “nimble and willing to quickly act to appropriate path for monetary policy”, claiming she was growing uncomfortable with the bank’s existing policy stance. These comments reinforce our view that interest rates in the UK are far more likely to be raised than cut over the course of 2017.

Bank of England member Jon Cunliffe will be the second rate-setter to speak in consecutive days today. Cunliffe will be speaking at the Greater Birmingham Chamber of Commerce at around 13:00 UK time.

EUR

The Euro slumped 0.3% on Tuesday to its lowest level against the Dollar since 30 January, dragged lower by political concerns and the very weak data out of the German economy.

Investors continued to remain fixated on political risks in Europe yesterday, primarily the pending Presidential election in France. The latest news out on Tuesday saw centrist Emmanuel Macron denying an extramarital affair, further strengthening Anti-EU Marine Le Pen’s hand ahead of the first round of voting in April.

This week continues to be a very quiet one in terms of macroeconomic data in the Eurozone, with the Euro likely to be driven by events elsewhere as a result.

USD

Having rallied sharply during Asian trading on Tuesday, the US Dollar lost ground off the back of some fairly dovish comments from a Federal Reserve member. The Dollar index ended London trading 0.2% lower.

Fed member Neel Kashkari claimed yesterday that the central bank in the US should keep its monetary policy accommodative. Kashkari suggested that little risk of surging inflation and no immediate threat to financial stability should be enough to prevent the central bank from raising rates too quickly this year.

Elsewhere, job openings data came in slightly less than expected, albeit remaining at a healthy enough rate. Job openings slipped to 5.501M from a revised 5.505M.

With no economic news today, traders will turn their attention to Thursday with Federal Reserve members Bullard ad Evans both scheduled to speak.