Sterling Consolidates Losses after BoE Disappoints
Today, the Pound seemed to overcome the shock of losing 1.3% in value against the US Dollar in the aftermath of the Bank of England’s (BoE) decision to raise borrowing costs. The BoE failed to provide a clear strategy for future hikes. The British currency gained ground against the Euro and the US Dollar, assisted by data which showed that the services sector in the UK performed better than expected in October. Ben Broadbent, who is the deputy governor of the BoE, admitted that households are going to see their budgets affected by the rate rise.
In the US, President Trump announced that he has nominated Fed governor Jerome Powell for the seat of the president of the Fed. Markets welcomed the news as Powell isn’t so radical as other candidates and is expected to follow Yellen’s footsteps regarding the monetary policy, at least in the beginning. House Republicans presented in Washington the tax reform bill, but analysts suggest that it will be amended further in the next weeks in order to pass as legislation.
Pound Sterling – UK Markets
Today, Sterling inched higher against the US Dollar with the exchange rate set at $1.30. The Pound edged up against the Euro with the exchange rate set at €1.12. The Pound rallied against the US and the single market currency after recording extended losses yesterday.
The deputy governor of the BoE for monetary policy, Ben Broadbent, spoke on BBC radio about the impact of the interest rate hike that was decided yesterday by the Monetary Policy Committee (MPC). Broadbent admitted that UK households will face difficulties. “There will be some pain and it’s one part of how monetary policy works,” noted Broadbent, who added that the rise was moderate. He said that the BoE anticipates that it will need maybe “a couple more rate rises to get inflation back on track, while at the same time supporting the economy.”
An IHS Markit survey regarding the UK services sector in October showed that the PMI rose to 55.6, higher than the 53.3 anticipated figure. October’s reading is a six-month high. The accompanying report said that the rate of job creation in services dropped to a seven-month low. Markit’s analysts noted that “the expansion of service sector output was the fastest since April, supported by improved order book and resilient client demand.”
US Dollar – US Markets
The US Dollar edged up against the Euro with the exchange rate set at €0.85. The US Dollar Index (DXY), which measures the value of the Dollar against six major currencies, came in at 94.80. President Trump revealed who will be the next Fed’s Chair and the Republicans presented the tax reform bill to the media.
Jerome Powell is the President-nominated successor of Janet Yellen in the leadership of the Federal Reserve. Powell will have to be approved by the Senate after a series of hearings that could start as early as December. Nomura’s analysts said in a report that “the nomination represents continuity of monetary policy. His remarks suggest that. At least in the near term, Powell is likely to follow the course of monetary policy set by the current core group of Yellen, Fischer and Dudley.”
House Republicans presented the long-awaited tax reform bill, preparing the ground for the second step which is approving and passing the legislation. The tax bill is expected to add roughly $1.5tn to the US budget deficit over the next ten years. The corporate tax cut of 20%, which had been a matter of discussion in previous days, appears to be a permanent issue now, as a Wall Street Journal (WSJ) report indicated. The tax plan favours big corporations and wealthy individuals.
Euro – European Markets
The Euro dipped against the US Dollar with the exchange rate set at $1.16. The single market currency hit a one-week high against the Dollar, but lost some strength when the US tax reform plan was presented to the media by the House Speaker Paul Ryan.
The European Central Bank’s (ECB) governing council member, Ewald Nowotny, said in an interview on Bloomberg TV that the central bank took the right decision regarding tapering in the last week’s monetary policy meeting. Nowotny noted that the Eurozone economy has improved substantially, but hasn’t met the targets yet. The Austrian economist added that inflation is moving in the right direction and that wage growth will eventually take off. Nowotny also said that it’s too early to discuss an end-date for the QE programme.
The ECB’s bank supervisor, Ignazio Angeloni, told the German newspaper Handelsblatt that the central bank will review how Eurozone banks are progressing in cutting down the numbers of non-performing loans (NPL). He also warned that the ECB is prepared to take measures against banks that are not moving fast enough towards that direction. Angeloni noted that the number of NPLs across the Eurozone is falling.
Other Currencies – Highlights
Sterling moved higher against the Australian Dollar, trading at 1.70 AUD. Retail sales in Australia stalled in September, on a month-to-month basis, coming in at 0%. Market analysts were expecting a 0.4% rise. A Westpac report said that retailers are facing trouble because they are cutting prices, but find no traction with volumes. Westpac’s analysts noted that consumers get some advantage from lower prices and don’t have to cut back on their purchases.
The Pound dropped against the New Zealand Dollar, trading at 1.88 NZD. Michael Reddell, an ex-member of the Reserve Bank of New Zealand (RBNZ), said that the new Labour government could start making changes to the RBNZ as early as March by appointing a new governor. “If you get a new governor who is sympathetic to the direction you want to go in, you can write quite a lot into the policy target agreement,” noted Reddell.
Sterling inched higher against the Czech Koruna, trading at 28.78 CZK. The Czech Central Bank (CNB) picked up its benchmark interest rate by 0.25%, in line with expectations.