Sterling recovers from near five month low on hawkish BoE

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22 May 2018

thomasdodds

The Pound recovered from its weakest position, in nearly five months, against the US Dollar on Tuesday morning after some hawkish comments from Bank of England member, Gertjan Vlieghe.

S
peaking along with fellow MPC members at this morning’s Inflation Report hearings, Vlieghe stated that he thought UK rates would be raised at a slightly faster pace than the market is currently pricing in. Currency markets have become increasingly sceptical that the Bank of England will raise interest rates in the UK this year, after a relatively dovish assessment in the latest MPC meeting earlier this month. Vlieghe, however, stated that he envisaged one or two 25 basis points hikes per year over the forecast period.

With BoE Governor, Mark Carney, placing increasing importance on upcoming macroeconomic news with regards to the bank’s next monetary policy move, Wednesday’s inflation and Thursday’s retail sales data could prove critical for Sterling this week. Ongoing concerns over the state of the Brexit negotiations have also far from supported the UK currency, and another outlandish claim from Nicola Sturgeon calling for a fresh Scottish Independence referendum, compounded losses.

Broad US Dollar strength yesterday morning proved short lived. The currency received headwinds after US Treasury Secretary, Mnuchin, claimed that the US was putting its trade war with China ‘on hold’. During a live television interview on ‘Fox News Sunday’, Mnuchin said that an agreement struck over the weekend by Chinese and American negotiators set up a framework for addressing trade imbalances. In the absence of any major economic news out of the US on Monday, the Dollar traded largely off the back of these positive comments throughout London trading.

Activity in the US looks relatively light on the ground again today, with the Richmond Fed manufacturing index not likely to shift the greenback. A speech by Fed Chair, Powell, on Friday could be the main market mover for the Dollar this week.

Oil prices advance to near three-and-a-half year highs

The Euro spent much of Monday trading on treading water, unsurprising given much of Europe was observing the Whit Monday Bank Holiday. It did, however, initiate a modest rebound this morning, although this was driven largely by a soft USD. Trading doesn’t look set to get going in earnest until Wednesday, when a string of economic data releases is due from across Europe, including the monthly PMI releases and revised German GDP numbers.

Elsewhere in the financial markets, oil prices continued to advance, with Brent crude oil now hovering around the $80 a barrel mark, its highest level since late 2014. This provided good support for commodity-driven currencies, with the Russian Ruble and Canadian Dollar among the two best performers yesterday.