GBP: I don’t believe you
Sterling fell back from its elevated levels of late yesterday as investors called the Bank of England’s bluff on the possibility of interest rate hikes in the near future.
The Bank of England voted to hold interest rates unanimously yesterday but were at pains to emphasise the need to raise interest rates in the near future so as to have a handle on inflation. This puzzled many, including ourselves, given the Bank had also chosen to cut its inflation forecasts through the next few years.
In short, I don’t think that sterling traders are paying much attention to what is going on at the Bank of England. The pound takes its orders at the moment from Westminster and until clarification on when/if Brexit will actually occur comes, then we think that interest rates will stay as they are. Last year’s increases in the base rate were supported by a much more benign political atmosphere and a stronger global economic growth picture; the BOE is unable to count on either at the moment.
Sterling has hurt a lot of people in markets of late, and there is an element of mistrust in the pound. We do not expect investors to materially back sterling and push it higher until the Brexit picture is a lot clearer.
While the results of the local elections are still coming in, the government doesn’t seem to have been given the beating that many expected. Turnout was low but it is noticeable as to how strongly anti-Brexit parties have done.
USD: How much further?
Dollar is once again pushing higher, buoyed by the belief that any cuts to interest rates may not come until late next year and falls in oil prices.
How much further this USD strength could run will depend on today’s payrolls announcement at 13.30. The recent performance of the jobs market will have contributed to the weakness in inflation and investment numbers and a reading this afternoon showing jobs growth of over 200,000 will drive further thoughts that the soft patch is over.
Have a great day and a better Bank Holiday weekend.