Pound Hits a One-Year High
The Pound hit a one-year high against the US Dollar and a two-month high against the Euro today, boosted by Marc Carney’s words who said that the Bank of England (BoE) is considering raising interest rates. In yesterday’s meeting, the Monetary Policy Committee (MPC) decided to keep the BoE’s interest rate unchanged at 0.25%, but noted in a statement that a reduction of monetary stimulus would be appropriate over the next months. The BoE’s Governor Carney acknowledged the need for that and the Pound strengthened considerably.
Gertjan Vlieghe, an MPC member, said in the morning that “the evolution of data is increasingly suggesting that we are approaching the moment when [the] bank rate may need to rise.” Vlieghe, who was in the past against any interest rate hike, added that he sees borrowing costs increasing in the coming months.
Pound Sterling – UK Markets
Today, the Pound performed excellent against the US Dollar, hitting a one-year high, with the exchange rate set above the $1.35 mark. Sterling strengthened against the Euro with the exchange rate set at €1.13. The British currency’s value got a boost after the BoE’s meeting yesterday with the strengthening of the Pound against the Dollar and the Euro continuing today.
The MPC decided, after a voting procedure took place, to keep the benchmark interest rate unchanged to the historic low of 0.25%. Seven MPC members voted in favour of that, while two voted for an immediate pick up of borrowing costs. What City analysts didn’t predict was Marc Carney noting, in the post-meeting press conference, that he agrees with the view of the MPC’s majority that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months.” The reason for this change of strategy, according to a BoE statement, is that the British economy is getting stronger and the squeeze on households is worsening because of inflation.
The BoE has set the inflation target at 2% and MPC members believe that a rise in borrowing costs could help in that as inflation in August came in at 2.9%. Analysts suggest that there is a 42% chance of an interest rate hike in November, double than a week ago. KPMG economists wrote in a report that perhaps a hike won’t happen during autumn because any rise of rates, combined with sluggish wage growth, would put more pressure on the average UK household. Rabobank’s analysts seem to agree with this view and add that they don’t see a rise in borrowing costs until the summer of 2018.
US Dollar – US Markets
The US Dollar edged lower against the Euro with the exchange rate set at €0.83. The US Dollar Index (DXY), which measures the value of the Dollar against six major currencies, moved higher coming in at 92.09. A new North Korean missile launch didn’t surprise the markets which dipped slightly.
Pyongyang showed once more that it defies the United Nations (UN) and sanctions imposed on North Korea by the UN Security Council. The North Korean army launched a missile that crossed Japanese airspace, over the island of Hokkaido, triggering defence alarms. The missile travelled 3,700km and crashed 2,000km west of Japan. This is the second test of such a missile in the last month. On Thursday, Pyongyang’s regime had threatened to sink the four biggest Japanese islands using nuclear weapons and reduce the US mainland to smokes and ashes.
In the US, consumer prices rose more than expected in August, this way increasing odds for a Fed interest rate hike during this year. Inflation rose by 0.4%, on a month-to-month basis, which is the strongest figure recorded in the last seven months. The strong inflation figure wasn’t expected by analysts and lifted expectations for an interest rate hike in December above 50% for the first time in the last few months.
Euro – European Markets
The Euro edged up against the US Dollar, with the exchange rate set at $1.19. The single market currency took advantage of the Dollar’s fall because of the growing tensions in the Korean peninsula.
A Reuters survey showed that fifty out of fifty-two economists polled believe that the European Central Bank (ECB) will announce the reduction of the asset-purchase programme on 26th October. They said that the ECB will extend its asset purchase programme by six months, but it will cut monthly purchases to €40bn. According to the survey, Eurozone inflation will be at 1.5% in 2017 and 1.4% in 2018.
Sabine Lautenschlaeger, an executive board member of the ECB board, delivered a speech on the “Monetary Policy-What’s Next?” conference, and said that inflation in the Eurozone is taking a bit longer to pick up. The German banker noted that some monetary accommodation is still needed to bring inflation back on a stable trend towards the ECB’s goal. Lautenschlager reiterated that it’s time to take a decision on scaling back bond purchases at the beginning of 2018.
Other Currencies – Highlights
Sterling jumped against the Australian Dollar, trading at 1.69 AUD. A National Bank of Australia (NAB) report says that the bank has increased its forecasts for GDP growth and inflation. The reasons, according to the report, are strong employment and investment data which has been released in the last few months. Analysts at NAB believe that the labour market will strengthen considerably allowing the Reserve Bank of Australia (RBA) to remove some of the stimulus currently in place.
The Pound edged up against the New Zealand Dollar, trading at 1.86 NZD. Westpac’s analysts commented on the latest REINZ housing report saying that the level of house sales is at the lowest level in the last three years. The REINZ report said that house sales fell by 0.8% in August. Westpac’s analysts don’t rule out a temporary post-election pick-up in demand, but they stress that house price growth will remain weak for some time more.
Sterling rose against the Swiss Franc, trading at 1.30 CHF. The Swiss National Bank (SNB) kept its benchmark interest rate on hold at -0.75% and revised its economic growth forecast to under 1%. An SNB report said that the Franc’s recent weakness has reduced significant overvaluation. However, the OECD still considers the Franc as the most overvalued currency.