The US dollar weakened against most of its major counterparts except versus the British pound which was pressured by the Bank of England’s Inflation Report and the Governor’s press conference. The euro surged to its highest level since October against the greenback while the commodity-linked currencies also got a boost.
The highlight of the day was the Bank of England meeting. While it was expected for the Bank to keep rates at 0.50% and QE unchanged, what surprised the markets and subsequently led to a pound sell-off was the MPC voting results which showed a vote count change from 8-1 to 9-0. This was due to MPC member McCafferty’s shift from being in favour of a rate hike to voting for steady rates. Meanwhile, the Bank’s Quarterly Inflation Report showed details of a downward shift in the UK inflation forecast for 2016.
Sterling, which was trading near $1.4660 before the report and policy announcement, tumbled close to $1.4500 before bouncing back to around $1.4600 during BoE Governor Mark Carney’s press conference. He suggested that the Bank’s next move in rates was more likely to be up than down.
The euro extended gains versus the dollar today to rise above the key $1.1200 level, hitting a fresh 3-1/2 month high. The broadly weaker dollar overshadowed ECB President Mario Draghi’s dovish comments and the release of the ECB’s Economic Bulletin which expressed concern for low inflation in the Eurozone.
The dollar index was driven to new three-month lows of 96.5 as a weakening in expectations of a further rise in US interest rates this year came about after dovish comments yesterday by New York Fed President William Dudley.
US data out today did not help the greenback, which fell briefly below the key 117 yen level. Initial jobless claims in the US rose more than expected by 8,000 to a seasonally adjusted 285,000 for the week ending January 30. Focus now turns to the all-important nonfarm payrolls report on Friday. Other US data out today showed factory orders posted their biggest drop in a year. The 2.9% fall was slightly more than the expected 2.8% and more than November’s 0.2% decline.
Gold benefited from the weaker dollar and rose to its highest in over three months, rising above $1155.
Oil prices also were buoyed by the weaker dollar. After a mostly quiet session, prices rallied to $33 a barrel.
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