BOE Suggesting Interest Rates Won’t Rise This Year

By Pete Southern in Currency Articles | May 14, 2015 11:28 |

So, the big news is that the Bank of England reduced its growth forecasts for this year and next, and in so doing appeared to indicate that interest rates won’t rise until this time next year. The cautionary statement from BoE Governor Mark Carney had a detrimental impact on the Pound against most of the majors – bar the US Dollar, which had problems of its own to contend with – because markets had been primed for an optimistic presser. The bank cut its 2015 growth forecast from 2.9% to 2.5% and its 2016 GDP forecast from 2.9% to 2.6%, to reflect a reduction in productivity and housebuilding projections.

However, UK labour market data printed slightly more optimistically, with the headline jobless rate tumbling to its lowest level since 2008 and average earnings rising 1.9%. Markets were cheered by the dip in unemployment from 5.6% to 5.5% and the unexpected uptick in pay packets but it was not enough to stop Sterling weakening when the quarterly inflation report was released.

Euro

The Pound to Euro exchange rate tumbled -100 pips yesterday as markets reacted to the Bank of England’s lack of enthusiasm at raising rates imminently and to a robust Eurozone GDP report.

Data showed that economic growth in the 19-nation bloc increased by 0.4% in the first three months of the year. Germany contributed a solid 0.3% – but could have been stronger had it not been for an imbalance of imports over exports – France chipped in with a surprisingly meaty 0.6% and Italy matched Germany – and the UK for that matter – with a respectable 0.3%.

The GDP report was encouraging for the most part, and seen as another sign that European Central Bank Chairman Mario Draghi’s expansive quantitative easing scheme is already beginning to have a positive impact on economic sentiment in the currency bloc. However, there were a couple of lowlights: Finland registered negative growth of -0.1%, putting the Nordic nation into a recession, and the Greeks also fell back into recession with a score of -0.2%.

US Dollar

It was a choppy day for ‘Cable’ yesterday as a number of different economic releases fed into the ocean of GBP/USD, each creating a new current of buy and sell orders.

The Pound initially rose to a five-month high against the US Dollar in reaction to the surprise uptick in UK wages from 1.7% to 1.9% but demand for Sterling tailed off during BoE Governor Mark Carney’s quarterly inflation report, which featured cautionary comments on the strength of the domestic currency. GBP/USD weakened when Carney mentioned that a strong Pound would slowdown the eventual rebound in UK consumer prices.

However, the Pound rallied back to fresh highs during the afternoon following a downbeat US retail sales report which showed that sales volumes remained stagnant at 0.0% during April compared to calls for a 0.2% rise. The downbeat figures caused some traders to reduce their US growth projections and subsequently push back their Federal Reserve interest rate hike bets and this weighed heavily on demand for the ‘Greenback’.

Canadian Dollar

During his post inflation report press conference yesterday morning BoE Governor Mark Carney admitted that he felt market projections for a first interest rate in the second quarter of 2016 were fairly accurate. Although this marks an improvement of three months on the previous hike estimates, it was not the hawkish signal that investors were looking for and it led to a dip in demand for the Pound. However, Sterling was able to claw back most of its losses by the end of the day.

Australian Dollar

The Pound to Australian Dollar exchange rate plunged -250 pips yesterday as the less-hawkish-than-anticipated BoE inflation report gave traders the perfect opportunity to take profit on a GBP/AUD rate, which had surged by over six cents over the last seven days. Demand for the ‘Aussie’ was also boosted by statements from the big three ratings agencies reaffirming Australia’s triple-A credit rating following the latest national budget.

New Zealand Dollar

Profit taking traders also took the Pound lower by around two cents against the New Zealand Dollar yesterday, despite comments from the Reserve Bank of New Zealand suggesting that the ‘Kiwi’ Dollar is sitting at an ‘unjustified and unsustainable’ level. GBP/NZD weakened following the BoE’s quarterly inflation report.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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