Pound pummelled as Bank of England revises down growth forecasts

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4 August 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling sank by almost one percent against both the US Dollar and the Euro on Thursday afternoon after the Bank of England left interest rates unchanged and revised downwards both its growth and inflation forecasts (Figure 1).

A
s we and indeed the majority of the market had anticipated, Ian McCafferty and Michael Saunders remained the two sole dissenters on the monetary policy committee voting for an immediate rate increase. Governor Mark Carney continued to reiterate his message that interest rates may be increased at a faster-than-expected pace over the next three years, possible within a year.

Figure 1: GBP/USD & GBP/EUR (02/08/2017 – 04/08/2017)

However, investors sold the currency hard off the back of a relatively sizable downward revision to its 2017 growth forecasts that somewhat exceed what the recent downward data surprises would suggest. The Bank of England now expects the UK economy to expand by just 1.7% this year compared to the previous 1.9% forecast, below the levels desirable for the process of policy normalisation. MPC members also judged that inflation was not yet sufficiently above target to warrant an increase in borrowing costs. While the BoE forecasts inflation to increase to around 3% by October it expects price growth to moderate next year before falling back towards 2% by 2020.

All in all this was a slightly more dovish message from the bank than the market expected. This was reflected by the sharp depreciation in Sterling which saw it slump to a fresh nine month trough against the Euro.

Dollar sell-off continues ahead of crucial nonfarm payrolls report

The seemingly relentless sell-off in the US Dollar continued for another day on Thursday after the latest data on the health of the US services sector came in well below expectations. ISM’s non-manufacturing PMI declined to just 53.9 in July, comfortably short of the 57.0 consensus.

All attention now shifts to today’s nonfarm payrolls report, undoubtedly the single most important economic data release on the economic calendar. Consensus is for a job creation figure around the 180,000 mark and a modest downtick in unemployment to just 4.3%. However, as has been the case in the past few months, traders seem to be placing greater importance on the average hourly earnings figure, given its potentially more significant implication on Federal Reserve policy. A strong earnings number could lead to a knee-jerk rally in the Dollar although if recent sentiment towards the currency is anything to go by, gains may be limited.

Eurozone retail sales beat boosts ECB policy hopes

The possibility of a big announcement in September on a dialling back of the European Central Bank’s stimulus programme were given somewhat of a boost yesterday following an encouraging set of retail sales data. Sales jumped by 3.1% in the Euro-area in the year to June, a much faster pace than expected, and its largest yearly increase in the measure since 2015. The Euro has now rallied by almost 10% since mid-May alone on expectations that the ECB will soon normalise policy.

With no economic news scheduled for release in the Eurozone today, the single currency will be driven entirely by this afternoon’s nonfarm payrolls report in the US.