BoE keep rate on hold but extra vote dissenter boosts Pound

Sterling has just bounced off some lower levels following the latest Bank of England interest rate decision.

As expected, they kept interest rates on hold at 0.5%, however there was an extra vote in favour of hiking rates this month therefore narrowing the vote to 6-3.

After a period of rather mixed UK data and ongoing Brexit issues, the market were expecting the voting to remain as last time, with only two dissenters, so this is a positive result for Sterling as it increases the chances of a nearer rate hike from the BoE. Since mid-April BoE expectations for nearer rate hikes were quashed and today’s decision should lend a bit of short-term relief for Sterling bulls.

Committee members highlighted they felt more confident that the slowdown seen in Q1 was temporary (weather-related) and that consumer spending/confidence has bounced back strongly. An August rate hike is therefore more likely now but it will heavily depend on how the data comes in between now and then. Wage and inflation levels will certainly need to show a bigger pickup for the BoE to make any change.

As a result, the GBP/USD has already moved up 1-cent from today’s low but still trades close to a 7-mth low. The GBP/EUR has jumped close to 1-cent higher and trades at the highest levels this week.

Has the USD rally reached its peak?

The USD has been on a very strong run since mid-April gaining around 10-cents against both the Pound and the Euro before the end of May. As we’ve entered June, however, this rally seems to have petered out a bit.

The question is whether we’ve seen the peak of this rally or whether it’s just taking a little breather before pushing further ahead.

Certainly in the bigger picture, calls at the start of the year for a weaker USD over 2018 are still in play, with the US still experiencing woeful fiscal and current account deficits, along with uncertainty over upcoming mid-term elections and the current heated trade war rhetoric from Trump’s government.

On top of this, there are a few good reasons why the dollar’s move might have run out of steam. First of all, the rally has been a very extended one (10-cents) and therefore you would expect some sort of retracement and profit-taking on a move this large.

Secondly, a lot of the Dollar strength came from negative sentiment towards other currencies which meant the Dollar looked the least ugly out of the bunch creating big flows into it. For example, a major U-turn in expectations for a BoE rate hike in May and weak UK economic data led to traders dumping Sterling. Also, weak economic data out of the Euro-zone, along with political issues in Italy (and Spain), led to the Euro losing its appeal over the past few months.

These problems for Sterling and the Euro were heavily priced into the rates but now there are signs that the market might have gone a bit overkill.  Data over the past few days seems to indicate that the UK economy might be picking up pace in the second quarter after a terrible Q1 in which bad weather (temporary) appears to have been a major factor.  Furthermore, the political situation in the Euro-zone seems to be calming and the ECB could announce an end to quantitative easing at their interest rate-setting meeting next week (Thurs) as well as raise growth forecasts.

If the data continues to improve for the UK and the Euro-zone, then we might start to see further flows out of the USD and into the Pound and Euro. It is a bit too early to say that the USD’s solid run has come to an end just yet though. The market will await for more evidence of a fading of the previous Euro and GBP impediments and see how things develop over in the US. At the same time, however, it’s unlikely that we’ll see the same momentum in the Greenback (in the near-term) as we’ve seen over the past few months.

Solid UK services data helps Sterling

Sterling has found a bit of reprieve this morning after data showed that our dominant services sector grew quicker than expected last month.

It was the highest reading we’ve seen since February and suggests that the UK might be having a bit of rebound in growth after a dismal first quarter. Although these solid number are encouraging for the outlook, alone they will not be enough for the Bank of England to change their wait-and-see approach heading into the August meeting.

Sterling has lost serious ground (particularly against the USD) since Mark Carney’s comments in mid-April which signalled a May rate hike was less likely (and in fact didn’t occur). Poor growth and economic data releases, coupled with ongoing Brexit concerns, meant they deemed it too risky to raise rates. The market debate is now revolving around whether they will hike at their August rate-setting meeting. Certainly if the Q2 data continues to perform better then there will be a good chance but we still have a lot of data to come before that meeting and obviously Brexit issues are coming back to the fore as the deadlines get nearer. The UK government are trying to make progress ahead of the next EU summit (end of June), but many feel they are struggling to make any decent headway with the party split on what they want.

In other news, the Euro had been taking a hit over uncertainty in the Italian election and formation of the new anti-establishment government. Over the last week, they’ve made progress and a few days ago the new government was sworn in. They are anti-austerity, vowing to cut taxes and hike spending, and this is being met with huge outrage from the EU who want Italy to deal with their huge national debt by tightening their belts. I’m sure this story is likely to be ongoing and fears that Italy could eventually leave the Euro are not out the question.

The USD has benefitted from this weakness in the Pound and Euro, along with a continuing strong economic performance. They look set to hike interest rates again this month and the odds have increased that they’ll end up making four rate hikes this year. The US trade wars President Trump has initiated, however, might scupper the USDs good run. The key one to watch here is how things develop with China and the US – watch this space.

As a result, the GBP/EUR is up around 0.5% today and trades fairly buoyantly around 1% off the highest levels in the past year. The GBP/USD is trading towards the top end of the past 10-days but not far off the lowest levels we’ve seen in past 6-mths.