Sterling slides after BoE raises rates, signals no rush to hike again

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3 August 2018

thomasdodds

The Pound fell to its lowest level in almost two weeks this morning after the Bank of England suggested that it was in no hurry to raise interest rates again any time soon.

A
s expected, the Bank of England raised interest rates for only the second time since the financial crisis on Thursday afternoon, with policymakers in the UK voting to raise rates by 25 basis points to 0.75%, its highest level since March 2009. Sterling initially rallied against most major currencies after the BoE announced that its monetary policy committee unexpectedly voted unanimously to increase rates. Investors were expecting at least one dissenter.

The central bank noted that recent economic data confirmed that the slowdown in the first quarter of the year was indeed temporary. Policymakers also stated that the economy was operating close to full capacity, suggesting that more domestically driven inflationary pressures could be on the horizon.

Sterling, however, fell by over half a percent against the US Dollar shortly after the bank’s cautious comments regarding future policy. Rate-setters noted that an ‘ongoing tightening of monetary policy over the forecast period would be appropriate’, although future hikes would be ‘at a gradual pace and to a limited extent’. Governor Carney’s press conference reiterated that rates would increase only gradually and that policy would need to ‘walk, not run’. He also raised concerns over Brexit, while leaving the door open to both a rate hike or a cut Brexit take a turn for the worse.

Both the meeting minutes and Mark Carney’s cautious comments suggest to us that the Bank of England is clearly in no rush to hike rates again any time soon, and will await further growth and inflation data before it considers whether more hikes would be appropriate. The prospect of additional rate increases does, of course, remain highly dependent on the nature of Britain’s agreement with the European Union, which continues to provide one of the major risk factors to both the UK economy and the Pound.

Will today’s nonfarm payrolls report support the US Dollar?

Away from events in the UK, the Euro edged modestly lower against the US Dollar, although the EUR/USD rate was little changed with few major economic releases or announcements to trade off.

Currency traders are placing one eye on this afternoon’s nonfarm payrolls report out of the US, which is expected to show that the world’s largest economy created another 190,000 net jobs in July. Economists pencilled in a modest decline in the unemployment rate from last month’s surprise increase in the measure, with earnings growth expected to come in unchanged at a healthy 2.7% year-on-year. With Wednesday’s ADP employment report and recent jobless claims beating expectations, we think that today’s report could surprise to the upside, which should provide some decent support for the US Dollar.