Sterling marches higher ahead of expected BoE rate hike

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31 October 2017

thomasdodds

The Pound jumped back above the 1.32 level against the US Dollar on Monday as investors continued to bet that the Bank of England would hike interest rates for the first time in over a decade at its highly anticipated monetary policy meeting on Thursday.

W
ith inflation rising to a comfortably above target 3% in September and growth surprising to the upside in the third quarter of the year, financial markets are now pricing in around a 90% chance of a rate increase from the BoE this week. We are expecting the bank to hike rates for the first time since July 2007 following recent hawkish rhetoric from policymakers that suggest the majority among the committee may be tilting towards tightening.

With an interest rate hike now heavily priced in, Sterling is expected to take its cue from the rhetoric in the statement, the quarterly Inflation Report and Carney’s accompanying press conference. We think the hint of additional interest rate hikes next year could provide solid support for Sterling this week.

Ahead of Thursday’s meeting, the Pound will largely be driven by events elsewhere. Wednesday’s manufacturing PMI could shift the currency if it materially deviates from consensus.

Eurozone inflation and growth data released today

The common currency recovered some much needed ground against the US Dollar yesterday, ending a recent run of declines that culminated in the currency losing well over one percent of its value last week.

This week will be a particularly busy one in the currency markets with a host of announcements across both sides of the Atlantic. Euro traders will look ahead to a number of economic data releases in the Eurozone this morning, all of which have the potential to shift the common currency. The latest third quarter GDP numbers are expected to show the Euro-area economy expanded by a relatively healthy 0.5% quarter-on-quarter, while unemployment is expected to tick downwards a multi-year low 9%. Arguably of more significance to European Central Bank policy is the October inflation data, which is expected to show that price growth slowed last month.

Dollar retraces gains after best week in 2017 so far

After posting its largest weekly rise so far this year, the US Dollar was brought back down to earth on Monday, selling off against most major currencies. Traders were in a cautious mood for much of the session following the news that Donald Trump’s former campaign manager faced charges of conspiring to defraud the US in dealings with Ukraine. As it turned out, investors largely overlooked the latest PCE index, the Fed’s preferred measure of inflation, which accelerated to 1.6% from 1.4%. This will be welcome news to the more hawkish members of the FOMC as the central bank approaches another interest rate hike before the end of the year.

With no more than second-tier economic announcements in the US this afternoon, investors will switch their attention to Wednesday evening’s Federal Reserve meeting. The central bank is expected to keep rates on hold and we will instead be looking for clues that policymakers in the US are growing more confident of a sustained rebound in inflation that would allow for another hike in December.