British Pound Slumps On "Super Thursday" as McCafferty Remains Sole Hawk
Editing by Gary Howes
Super Thursday has proved to be a negative for the pound sterling as the Bank of England appears to be stubbornly resistant to raising interest rates.
The pound exchange rate complex has fallen back after it was shown that only one member of the Bank of England's Monetary Policy Committee (MPC) favours raising interest rates.
We needed at least Kristin Forbes or Martin Weale to join Ian McCafferty for the GBP to hold gains or move higher.
Another negative for sterling was the downgrading of the Bank's economic forecasts from 2.8% to 2.7%.
Also thwarting the GBP bulls was the warning that inflation risks were skewed to the downside over the next two years.
The strength of the pound also appears to be an issue with the BoE noting, "The outlook for inflation reflects the balance between persistent drags from factors such as sterling and world export prices, and prospective further increases in domestic cost growth."
Sustained losses will however likely be prevented by this sliver of hakwishness:
"Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust. As a result, domestic demand growth has been solid despite the fiscal consolidation."
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The reduction in BoE CPI forecasts and the reference to not enough CPI pressure to justify a rate hike now, as there are downside CPI risks over the next two years, "will have prompted the market to push rate hike expectations back into the middle distance," points out Jeremy Stretch at CIBC.
"This reversal has encouraged a kneejerk sell off in Sterling. However, we would be wary of extrapolating the move," says Stretch.
British Pound Enters Super Thursday on the Front Foot
Yesterday, GBP extended its gain on the EUR against the backdrop of dovish statements from the European Central Bank (ECB) President Mario Draghi.
However, the GBP fell against the USD, despite earlier positive movements. This slide against the USD was due to “better than expected” labour data and Automatic Data Processing (ADP) non-farm payrolls from the US, as well as a higher probability of a US interest rate hike in December.
Purchasing managers’ index (PMI) data from the UK services industry showed steady growth for the month of October, meeting expectations. After three straight months of low growth, this is a welcoming sign that may suggest there could be an up-tick in the general British economy.
Ilya Spivak, Currency Strategist, at DailyFX, states, “The broad trend in UK economic news-flow has steadily improved since mid-June. A steady uptrend in revisions to economists’ forecasts is also encouraging. This would probably set the stage for BOE tightening if inflation readings were not stubbornly stuck in a 4-year down trend. Last year’s oil plunge is only half of the story however: core inflation is also worryingly low.
"Beyond energy prices, the Bank has linked sluggish price growth to the impact of Sterling strength. Indeed, the UK unit has trended higher against the currencies of key trade partners, weighing on import costs. On balance, this means the BoE will probably opt for a wait-and-see posture for now, marking time until it can assess the degree to which on-coming ECB easing and Fed tightening alter FX headwinds while the oil slump drops out of year-on-year CPI calculations.
"Options pricing suggests investors are biased in favour for a stronger British Pound against most of its top counterparts. In this context, a broadly neutral result that keeps standing mid-2016 tightening bets intact ought to give the currency a near-term boost, but follow-through might be limited. Taken against a backdrop of ebbing global growth bets however, a bias toward tightening may weigh on risk appetite and weigh on sentiment-geared FX like the Australian and New Zealand Dollars."
