Global Themes

UK rates on hold - Sterling slides 
- Open ended BOE weighs on Sterling 
- Softer inflation dampens dollar’s week 
- CAD hits 16-week high


Open ended BOE weighs on Sterling
As widely expected, the Bank of England (BOE) voted 7-2 in favour of keeping interest rates at 0.5% on Thursday.

The announcement saw the day’s trading session open and close within 30 pips, leaving Sterling just above $1.35 against the US Dollar by close of business. GBP/USD did rally to $1.36 for a brief period during yesterday’s session, before retreating to the $1.34 handle after the Monetary Policy Committee (MPC) cut 2018 forecasts for both inflation and growth. GBP/EUR trades around €1.1350 this morning, falling over 1 cent from yesterday’s high of €1.1455.

The outlook for growth has been cut from 1.8% for 2018 to 1.4%, which follows the poor Q1 GDP. On inflation, the MPC forecasted that the number will return to the 2% target in the next two years as prices are already adjusting to the weaker pound. With the growth outlook cut, and the suggestion that inflation will adjust without an intervention from the BOE, the impetus for a rate increase in the short term does seem to have been lost. Prior to the announcement from the BOE, a Reuters forecast predicted an interest rate rise from the bank before the end of the year stood at a probability of 90%, this has now fallen to 80%.

The time period for rate changes now looks to be three quarter point increases by 2021 (source: Financial Times). This does mean that a change in policy in 2018 is still possible, and Governor Mark Carney did also point out that the poor Q1 GDP figure could still be revised higher. If GDP starts to pick up, the BOE could still act in Q3. The question is that if the Bank does start hinting at a rate rise again, will market participants speculate as aggressively as we saw earlier this year when GBP/USD was above $1.42, or will they take it with a pinch of salt and wait for the BOE to actually act?


Softer inflation dampens dollar’s week
Softer US inflation dampened the US Dollar’s run yesterday, but the US Dollar index is still on track to close the week out higher than it started.

Analysts see US yields propping the dollar up in the short term but could expect the recent rally to eventually run out of steam (source: Reuters). A close above 92.57 will see the index notch its 4th consecutive week of gains. With CPI inflation released yesterday falling below forecast, this number supports a more gradual rate increase from the Federal Reserve (Fed) as opposed to an aggressive one, which has been previously hinted at by some policymakers.

EUR/USD bounced back above the $1.19 handle yesterday after the inflation release but has struggled to gain much traction past these levels, falling back into the $1.18 handle this morning. The dollar seems to still be the more favoured currency, with the outlook from the Fed looking more hawkish than any other major central bank. No US data today could limit the price action from the dollar.


CAD hits 16-week high
The Canadian dollar has reached a 16-week high against Sterling.

The CAD is set to close out its 8th consecutive week of gains, forcing GBP/CAD over 6% lower from C$1.8414 to C$1.7255. One of the key driving forces behind the Loonies strength has come from Brent crude oil prices. The Canadian dollar is a commodity driven currency and Brent crude oil prices have surged in the last 8 weeks, from $70 US dollars per barrel to $78. Some forecasters predict that oil prices could be as high as $100 per barrel in 2019, which could help CAD strengthen higher against its peers if oil prices continue to rise.

Canadian unemployment data for the period of April is released at 1:30pm, and is expected to stay flat at 5.8%. However, if Canada sees a drop in unemployment, this could help encourage the Bank of Canada to bring forward its plans over raising interest rates, and as a result, strengthen the dollar.  

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