1. Sterling firmer on caution from BoE’s Forbes about cutting rates

Sterling firmer on caution from BoE’s Forbes about cutting rates

Sterling rose on Thursday after another Bank of England interest rate-setter, Kristin Forbes, said the central bank should not rush into a decision to cut interest rates.

By: | London | Published: July 21, 2016 2:40 PM
The BoE said last week that most of the nine members of its Monetary Policy Committee expected to give the economy more help at their next meeting which ends on Aug. 4. But two of them seem to be in a wait and watch mode, giving the pound a fillip. (Source: Reuters)

Sterling rose on Thursday after another Bank of England interest rate-setter, Kristin Forbes, said the central bank should not rush into a decision to cut interest rates.

Earlier this week, noted hawk and policymaker Martin Weale said he was unsure if he would back an interest rate cut at next month’s meeting. Mirroring that view, Forbes in an article in the Daily Telegraph said that until more hard data is available, it would be good to “keep calm and carry on”.

The BoE said last week that most of the nine members of its Monetary Policy Committee expected to give the economy more help at their next meeting which ends on Aug. 4. But two of them seem to be in a wait and watch mode, giving the pound a fillip.

“The more hawkish members of the MPC are coming out against their support for easing in August,” said Hans Redeker, head of currency strategy at Morgan Stanley.

“This could cause markets to limit how much easing they price in for August. We remain sellers of sterling/dollar on rebounds as our economists are expecting enough members to vote for easing.”

Sterling was up 0.4 percent at $1.3254, while the euro was down 0.2 percent at 83.20 pence. The euro was also weighed down by expectations that European Central Bank chief Mario Draghi could sound dovish at a press conference later in the day. The ECB policy-setting committee meets on Thursday and is widely expected to keep rates unchanged.

On Wednesday, the pound had risen after a BoE survey showed no clear evidence of a slowing of activity after last month’s Brexit vote. The survey reported signs that demand for credit was easing and there were lower expectations for investment spending, but it also said the majority of companies did not expect any near-term impact on capital spending.

The focus will be on retail sales data at 0830 GMT. It is expected to show a drop of 0.6 percent in June from a month ago, while for the year, sales are expected to show a growth of 5 percent, down from 6 percent in May. The data, though, is unlikely to materially alter views about the state of the economy.

Public sector borrowing data will be released at the same time and could show some improvement. But with fiscal policy likely to be loosened to cushion the economy from the Brexit shock, borrowings could rise in coming months.

Flash PMI surveys of company purchasing managers on Friday will offer more insight on the immediate economic reaction to the vote, traders and analysts said.

“We suspect that tomorrow’s key flash PMI data may not be as damaging as originally thought,” said Viraj Patel, currency strategist at ING.

“Relatively constructive UK data would lead to some modest sterling upside, although we caution against chasing any short-term rally given the medium-term uncertainties that lie ahead.”

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