Sterling Falls as Carney Keeps Interest Rates on Hold
Sterling fell sharply against the US Dollar and the Euro when the Governor of the Bank of England (BoE), Mark Carney, said that this is not the right time to proceed with a rate adjustment. Carney suggested that there is no reason yet to raise the BoE’s benchmark interest rate, given the still subdued domestic inflationary pressures and, especially, the weak wage growth in the UK. Carney also expressed the opinion that there should be some transitional deal between the UK and the European Union in order to help firms cope with Brexit.
The technology sector, which has led US stock market gains in the last month, has rebounded after tumbling last week, helping the S&P500 hit a record-high. Analysts suggest that tech shares are a good option for investors to put their money in, since there is a lack of alternative for company shares that can offer the same profit right now in the market.
Pound Sterling – UK Markets
Today, Sterling slumped to a one-week low against the US Dollar, trading at $1.26. The Pound also dropped against the Euro with the exchange rate set at €1.13. The British currency dropped when the BoE’s Governor, Mark Carney, said in a speech at the Mansion House in London that it’s not the right time to raise the BoE’s benchmark interest rate.
Carney expressed the opinion that the strategy of raising borrowing costs at this moment would be wrong, since there is no prediction how the UK-EU Brexit negotiations will play out. The BoE’s Governor appeared very cautious regarding the implications that Brexit may have on the UK’s economy. As he suggested “monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises.”
Mark Carney said that making Brexit a success depends clearly on whether the two negotiating sides can reach a transition agreement. The Governor also warned that firms on both sides of the English Channel may soon need to activate contingency plans. Chancellor Philip Hammond delivering a speech at the Mansion House, just before Mark Carney, said that Britons are tired of austerity after seven years and added that the Conservatives are committed to keeping taxes as low as possible. Hammond agreed with Carney’s opinion that this is not a good time for raising borrowing costs because, as he said, “that only passes the bill onto future generations.”
US Dollar – US Markets
The US Dollar dropped against the Euro, trading at €0.89. Stanley Fischer, who is the US Federal Reserve vice chairman, delivered a speech to the DNB-Riksbank macroprudential conference, in which he preferred not to address matters regarding the outlook for the US monetary policy or the economy.
Fischer stressed that it’s essential for governments to do more in order to prevent a new financial crisis. The Fed’s vice chairman proposed measures such as stress tests for banks in case house prices decline significantly, as it happened in the last years and making easier the avoidance of foreclosures, which, as he said, “hurt both the lenders and the borrowers.”
Technology shares bounced back after crashing last week. The increase in their prices led the S&P500 and the Dow industrial average to hit record highs. Market analysts suggest that the hi-tech shares went through a correction that shouldn’t keep investors away from them because the share profits are expected to see aggressive growth in the next few years.
Euro – European Markets
The Euro gained a bit of ground against the US Dollar with the exchange rate set at $1.11. Analysts at Wells Fargo suggest that the Eurozone’s GDP expansion is “becoming increasingly self-sustaining.”
However, in their report it is noted that the actual state of the Eurozone economy doesn’t appear to be as strong as the sentiment indicators show. One of the biggest Eurozone problems is the banking sector. Daniel Nouy, the European Central Bank’s (ECB) supervisor, told the European Parliament’s (EP) economic affairs committee that, while banks are making progress in reducing bad debt, more decisive actions are still required. Nouy said that “the quality of banks’ assets continues to be a serious challenge in the banking union as a whole, but the problem is also concentrated in certain countries.”
Other Currencies – Highlights
Sterling lost 0.6% in value against the Australian Dollar, trading at 1.66 AUD. The Aussie rose on news that the Reserve Bank of Australia (RBA) views the weak first quarter GDP reading as transitory and that it expects the economic growth to continue gradually. In the minutes of the RBA’s June board meeting, the benchmark interest rate was kept unchanged at 1.5%, which is a historic low. The RBA stated that forward looking labour indicators are positive, but low wage growth continues to restrict consumption. In other news, Moody’s credit rating agency downgraded the credit rating of twelve Australian banks, including the four major ones citing risks in the household sector as the cause of the action.
The Pound slumped against the New Zealand Dollar, losing 0.3% in value and trading at 1.74 NZD. As market analysts suggest, the Kiwi may experience volatility later in the day when attention will be shifted to the results of the Global Dairy Trade auction. Analysts expect a 1% rise in whole milk powder prices and any fluctuation around that mark could affect the Kiwi. Moody’s downgraded the credit ratings of the four big New Zealand banks (ANZ, CBA, NAB and Westpac) in line with downgrades of their Australian parent banks.