Sterling edges higher ahead of Thursday’s Bank of England meeting

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13 September 2016

Matthew Ryan

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

The Pound rallied back above the 1.33 level against the US Dollar yesterday as Sterling traders turned their attention to this Thursday’s monetary policy meeting from the Bank of England.

P
olicymakers in the UK will meet this week for the first time since cutting interest rates to a fresh record low of 0.25%. However, with economic data showing signs of improvement, expectations are now firmly in favour of no immediate need for a change in policy. Some investors have recently began fretting that rates could be cut to as low as zero in the coming months, after Governor of the Bank of England Mark Carney left the door open to fresh stimulus at last week’s inflation report hearings.

In the US, we saw a number of speeches from Federal Reserve officials yesterday, which provided few clear indications as to the likely timing of future interest rate hikes. Fed member Lockhart claimed he expected a ‘serious discussion’ about the possibility of an immediate hike at the Fed’s September meeting.

Fellow Fed members Kashkari and Brainard also spoke on Monday, although both struck a fairly cautious tone. Kashkari suggested there was little urgency to raise rates for the second time since the financial crisis, while Brainard claimed the case for a September hike was ‘less compelling’.

The latest headline inflation figure in the UK this morning remained unchanged at 0.6%, defying expectations for an increase. President of the European Central Bank Mario Draghi also followed up his appearance last Thursday with another speech in Italy this morning, although, as expected, he failed to make any significant market moving comments.

Major currencies in detail:

GBP

Sterling ended 0.4% higher against the US Dollar on Monday, with investors expecting no change in policy from the Bank of England this week.

Investors were in a fairly cautious mood on Monday, with the market expecting the BoE to signal it will wait for further economic data before deciding on its next monetary policy move.

Rating agency Standard & Poor’s yesterday warned that the recent improvement in data in the UK may prove to be a ‘mirage’ as uncertainty about the country’s relationship with the European Union weighs on business investment.

This Thursday’s Bank of England meeting will undoubtedly be the main event in the UK this week. The interest rate announcement and statement will be released at midday.

EUR

A lack of any significant economic releases in the Eurozone yesterday meant the Euro was little moved, ending 0.1% lower against the US Dollar.

The main news out of the Eurozone yesterday came from Germany’s Economy Ministry, which claimed that growth in Germany was likely to slow in the second half of 2016. Germany’s economy is expected to expand at a ‘moderate pace’, although downside risks from abroad, particularly following the Brexit vote, look set to limit Q3 growth to less than the 0.4% recorded in the second quarter of the year.

The latest ZEW economic confidence indexes are due out in the Eurozone this morning and are expected to show a modest improvement on August’s numbers.

USD

The US Dollar was little moved against its major peers on Monday, ending 0.1% lower.

Attention in the US remains squarely on the timing of the next interest rate hike by the Federal Reserve. Minneapolis Fed President Neel Kashkari appeared unconvinced by the prospect of a September hike, claiming that the US economy continued to ‘muddle along’ following the recent weak jobs report and low inflation data.

Fed funds futures now appear to be in agreement and are currently discounting the possibility of higher rates this month, pricing in just a 21% chance of a hike in September.

Today is void of any major US economic releases. Retail sales on Thursday will be the next US announcement that may impact the Dollar.

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