Sterling slides despite first Bank of England rate hike in ten years

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3 November 2017

thomasdodds

Sterling slumped by over one-and-a-half percent against both the US Dollar and Euro on Thursday after the Bank of England delivered a ‘dovish hike’ that suggested future interest rate increases would occur at a very gradual pace.

M
ore than a decade after its last hike, the Bank of England announced on Thursday afternoon that it would be increasing its benchmark interest rate by 25 basis points back to 0.5%, a little over a year after rates were cut in the immediate aftermath of the Brexit vote. As we had anticipated prior to today’s meeting the more dovish Ramsden and Cunliffe both voted to hold rates steady. The vote was split 7-2 in favour of a rate increase, a slightly more comfortable majority than the 6-3 vote that the market and indeed ourselves had anticipated.

With a hike today almost entirely priced in by the market, currency traders took their cue from the tone of communications in the bank’s meeting minutes, rather than the rate decision itself. The bank adopted a cautious tone with regards to addition policy tightening with all members agreeing that future interest rate hikes would be both ‘at a gradual pace and to a limited extent’. It also said that its economic forecasts were based off just two future interest rate rises over the next three years, a slower pace than originally expected.

The bank voiced particular concern over Britain’s decision to leave the European Union, claiming that the Brexit process was already having a ‘noticeable impact’ on the economic outlook. The BoE clearly remains wary of the downside risks posed from Brexit and yesterday’s communications suggests it is still some way off from joining the Federal Reserve in engaging in a full on hiking cycle. The prospect of another prolonged period of stable rates in the UK could present a drag on the Pound in the short term. However, with the market still pricing in just about the worst case scenario to Brexit negotiations, we think there remains room for long term Sterling gains against most major currencies.

Jerome Powell nominated as next Federal Reserve Chair

The Pound was by far and away the biggest mover in the currency markets yesterday, with the US Dollar index ending the London session more-or-less unchanged. The other main news story was undoubtedly the announcement of Donald Trump’s nominee for the next Chair of the Federal Reserve, Jerome Powell. Powell is seen as a status quo pick that is unlikely to materially change the path of Fed hikes when he takes over from Janet Yellen when her term expires next year.

Focus now shifts to this afternoon’s US labour report, including the latest nonfarm payrolls number. Consensus is for a bumper nonfarm payrolls number in excess of 300,000. However, with October’s report again heavily impacted by the recent hurricanes, investors are likely to overlook today’s announcement.

Meanwhile, the Euro edged modestly higher against the US Dollar despite a mixed set of business activity PMIs. The manufacturing PMI edged lower to 58.5 from 58.6, although with more significant announcements on the docket, this was largely overlooked. With no major releases in the Eurozone today, the common currency will again be driven by events elsewhere.