The British pound (GBP) has fallen back against the US dollar as markets react negatively to signs to the UK's base interest rate won't be lifted until well into 2015.
Interest rate and central bank policy is the main driver of foreign exchange valuations on markets at the present time and news from the Bank of England today drove a new round of sterling selling.
The pound sterling was near a 10-day peak against the dollar at the start of the week but markets are now firmly in sell mode.
As anticipated, the broader tone of the meeting was also more dovish, consistent with the market having pushed back expectations for BoE rate rises between the September and October meetings.
The reaction of the markets would suggest they were in fact not expecting this:
- The pound to euro exchange rate is today is 0.19 pct higher at 1.2694. (See recent history and graph)
- The euro to dollar exchange rate is today 0.47 pct lower at 1.2656.
- The pound to dollar exchange rate (GBP/USD) is 0.30 pct lower at 1.6067.
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The pound rate today
The BoE voted 7-2 to leave interest rates and QE on hold at their October meeting - unchanged from last month (with Weale and McCafferty remaining the dissenters) and in line with expectations.
As anticipated, the broader tone of the meeting was also more dovish, consistent with the market having pushed back expectations for BoE rate rises between the September and October meetings.
So if the markets were expecting this, why are they selling? This is a question we too would like to know.
Nick Bate at Bank of America reckons the GBP sell-off may be a bit rich:
"The Minutes have done little to alter our near-term view on GBP and we would expect sterling to reverse some its immediate post-release losses."
Ahead of the release Lloyds Bank Research told us:
"Focus for today will turn to the BoE MPC minutes for the October meeting. They are expected to show a continuation of the 7-2 voting split against an immediate interest rate rise; recent rhetoric from Martin Weale suggests he stands firm on his hawkish view, and there is little sign the other members will join the two dissenters anytime soon.
"The MPC are also likely to have had a look at the weak September inflation print (CPI fell to a 5-year low of 1.2% y/y) at the meeting. The memberโs take on the weak CPI print and whether it is of concern will be closely watched, and may pose some risks to GBP."
Sterling is trading on the front foot against a host of major currencies, as its nascent recovery continues to stick.
Housing data remains strong, with Rightmove house prices rising 2.6%m/m and 7.6%y/y.
Last weekโs soft inflation print, rising just 1.2%y/y on headline and 1.5% on core, combined with growing economic fears have shifted the GBP's outlook lower.
This week, there is a slew of data for the UK, with the release of the BoE minutes, retail sales, and Q3 GDP (expected to come in at 0.7%q/q and 3.0%y/y).
The Euro Rate Today
Several banks possibly failing ECB's stress tests as well as the better than expected US inflation numbers put pressure on the EUR on Wednesday.
Fixed income investment firm Pimco's global banking specialist, Philippe Bodereau, expects 18 banks will be seen to have failed the European Central Bank's stress test of 130 regional lenders when results are published by the ECB on Sunday.
Bodereau, who manages $4.3 billion in the Pimco GIS Capital Securities Fund, said in an interview on Wednesday the failures would likely include some German and Austrian cooperative and public sector banks, as well as weak regional lenders in the southern periphery.
The euro exchange rate complex was set packing lower when it was rumoured that the European Central Bank would be approaching the corporate debt markets in its quest to pump cash into the Eurozone economy.
Furthermore, the ECB confirmed that it began purchasing covered bonds yesterday and will reveal how much it purchased every Monday afternoon and that the purchases of ABS are expected to begin later this year.
"Still with downside risks to inflation and growth in the euro-zone continuing to build, the ECB remains under pressure to deliver further easing which if delivered could trigger renewed euro weakness," says Bank of Tokyo-Mitsubishi.
The euro had earlier held near the upper end of recent ranges against the dollar as investors took advantage of last weekโs pullback in the dollar to buy back the euro after nearly three-months of steady selling.
"While near-term volatility and market swings will keep price action choppy, the euroโs medium to longer-term outlook remains challenged," notes Esiner.
Data overnight showed German producer prices fell for the 14th-straignt month in September, which is likely to keep fears of euro zone deflation on the front burner.
"Investors will look to this Thursdayโs PMI reports for the 18-member bloc for the latest signs that anemic growth and disinflation will require the ECB to ease monetary conditions further," says Esiner.
Dollar rate today
"US inflation on the warm side of expectations helped the dollar curve out new one-week highs against the euro. The headline CPI held at 1.7 percent in September, versus forecasts to soften to 1.6 percent. Core prices held at 1.7 percent, as expected. Although inflation continues to run below the Fedโs 2 percent benchmark, by not slowing further it kept the door cracked to an earlier rate hike, buoying the buck," says Joe Manimbo at Western Union in reference to today's main event for the USD.
Last week, worries about global deflation, Ebola, a clouded outlook for Fed policy, geopolitical uncertainty and mounting signs that the euro zone is headed for another recession sent global markets into a tailspin.
"The resulting flight to safety out of equities and into Treasuries pushed yields sharply lower and weighed on the previously buoyant greenback. A one-day slide in bond yields resulted in the 10-year Treasury yield falling to a 16-month low of 1.86%, which deeply damaged the dollarโs near-term appeal," says Esiner.
Importantly, notes the ComFex analyst, a number of Fed policymakers sounded a surprisingly dovish tone, which echoed the minutes of the most recent FOMC monetary policy meeting suggesting a strong dollar and macroeconomic uncertainties may be playing a bigger role in Fed policymaking than investors had expected.
Keep in mind that the further out Fed rate hike expectations get pushed, the more the dollar will struggle to recoup recent losses.
"However, most of the dovish comments from Fed officials came from known policy doves. Absent similarly dovish comments from the Fed Chair or Vice Chair, it may be premature to assume a shift in Fed policy stance based on one week of market volatility. Moreover, the general tone of U.S. economic data has remained strong. Consequently, the dollar should regain its footing when the extreme market swings subside and underlying fundamentals come back in focus," says Esiner.
