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European Session – Sterling underperforms as BoE expected to hold rates for longer while dollar firm on Fed rate hike outlook

Thursday was a busy day in terms of economic data and events, which included Eurozone data and US jobless claims, and the highlight being the Bank of England policy announcement.

Today was known as “Super Thursday” in the UK, which included the Bank of England’s rate decision, inflation report and meeting minutes, as well as Governor Mark Carney’s press conference.

The overall less hawkish tone from the BoE led to sterling’s underperformance as the central bank appeared set to keep rates on hold for longer than previously expected. The MPC vote count at 8-1 in favour of holding rates at a record low 0.5% was unchanged from the prior meeting. The Inflation Report highlighted expectations of a slower rise in inflation relative to August and underscored concerns about downside risks to the inflation forecast.

The pound fell after the BoE announcement from 1.5390 down to 1.5264 and continued lower into the US session to 1.5222.

The weaker pound helped the euro bounce from an eleven-week low of 0.7041 to 0.7149.

The single currency also trimmed losses made versus the dollar to rise to a session high of 1.0896 from an over three-month low of 1.0833. Early session weakness was due to soft German industrial orders which were much lower-than-expected in September. Orders fell -1.7% m/m versus 1.0% expected. Other data showed Eurozone retail sales came in at -0.1% m/m in September versus 0.2% expected.

Meanwhile, the European Commission issued new economic forecasts. It upgraded its 2015 Eurozone growth forecast to 1.6% from 1.5% previously but cut the growth forecast for next year to 1.8%, down from its previous forecast of 1.9% in May. Also it made a downward revision to the 2016 inflation forecast from 1.5% to 1.0%, below the ECB’s inflation target.

During a speech given in Milan today, ECB President Mario Draghi reiterated his dovish tone and said the ECB was not constrained in its ability to act and has many tools at its disposal.

This diverging monetary policy path of the ECB and the Fed (which is on course for a rate hike) has led to downside pressure on the euro against the dollar recently.

The growing expectation of a rate hike in December has pushed the greenback up against the yen to come close to the 122 handle today for the first time since August. The dollar’s upside momentum was capped after disappointing US jobless claims data. The number of Americans filing unemployment benefits rose sharply in the last week of October to reach a two-month high of 276k. This was a gain of 16k from the previous 260k and more than the 262k expected.

However, today’s number did not have a huge impact on the dollar as the jobless claims number remains near a fifteen-year low. Also, the market’s main focus will be on Friday’s all-important nonfarm payrolls number.

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