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Currency Market Analysis

Nov 07, 2019 | Currency Market Analysis

Global Themes

The British pound fell to two-week lows after the Bank of England surprised with a split decision to keep interest rates unchanged at 0.75%. The 7-2 vote in favor of keeping policy unchanged suggested the next move in rates would be downward and could come sooner rather than later. The dovish decision, coupled with a subdued outlook for the U.K. economy, sent sterling to multiweek lows. The greenback also rose against the yen but was overall flat due to weakness versus the euro and trade-sensitive currencies from Canada, Australia and emerging markets. Market sentiment welcomed reports of incremental rollbacks in U.S. and Chinese tariffs which kept alive hopes of a limited trade deal over coming weeks. Some concrete good news on trade would help to alleviate some of the headwinds that have weighed on global growth and led the Fed to cut interest rates several times this year.


Constructive news overnight on the U.S.-China trade dispute translated into support from trade-oriented currencies like the loonie, Aussie dollar and emerging markets. Reports indicated that the U.S. and China agreed to incremental rollbacks of some tariffs, a precursor to a limited trade agreement in the weeks ahead. Buoyant markets, with oil up more than 1% and above $57, boosted Canada’s commodity-influenced currency. Canada’s monthly jobs report Friday is seen as crucial for the loonie given that it could potentially make or break the case for a Bank of Canada rate cut in December. 


The euro kept its chin above water on the day but remained in the red for the week. No encore performance for the German economy which today released another worrisome report as industrial output tumbled 0.6% in September. A day earlier data showed a robust 1.3% jump in German industrial orders. The euro’s steadier bias reflects the nascent view that Germany may have already weathered the worst of the slowdown. 


So much for the Bank of England being a non-event. A dovish and split decision by Britain’s central bank to maintain steady interest rates of 0.75% caught a market off-guard and catalyzed a sterling selloff. The BOE voted 7-2 to hold rates steady. But two officials endorsed a rate cut to bolster U.K. growth from global weakness and persistent Brexit uncertainty that has squeezed business investment. Markets raced to pull forward expectations of a rate cut, sending sterling sliding. Odds of a cut in 2020 jumped to 80% from a little over 50% before today’s decision.

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