GBP: Interest rate debate puts GBP higher
EUR: Weak dollar could drag it further upwards
USD: Beset by political problems
With unanimous votes to hold interest rates and QE at their current levels the Bank of England today has shown that it believes the current level of support it is offering the UK economy is sufficient but highlights further risks moving forward. The recovery is not going to be v-shaped – expecting the economy to return to Q4 19 size not before end of 2021- and that inflation will not reach its target over the 2-year forecast period.
There is a useful summary of all things negative interest rates that will get some folks excited given a popular prediction that borrowing costs could fall below zero by the end of the year. While some will see this is a table setting for yet another change in UK monetary policy, others will be comforted by the Bank of England’s own words that negative rates at this time could be less effective as a tool to stimulate economy than other measures.
Sterling has taken that comment and gone for a run higher but there are a lot of economic and political hurdles that have to be jumped before the Bank of England can completely dismiss the chances of further extraordinary monetary policy and therefore, we can fully dismiss sterling downside; there is a lot of 2-way risk in sterling coming.
The single currency benefited from strong PMI numbers yesterday showing a decent rebound in the combined services sectors of the Eurozone. While the headline sentiment numbers were indeed positive with activity supported by a surge in new orders, the issue remains the sustainability of this recovery given the increase in sectoral redundancies and a likely cessation of wider investment until the horizon is seen more clearly, with the prospect of further lockdowns likely to keep businesses in a state of caution.
EURUSD has managed to move higher on the wider USD weakness and looks more than ready to leap on any additional upside presented by a faltering dollar.
Poor economic and virus news from the states yesterday allowed the USD to weaken through yesterday’s session with investors dialling into the combination of rising Covid-19 cases and an impasse in Washington over support for those affected by workplace closures.
With the Bank of England meeting now out of the way today’s jobless claims and tomorrow’s payrolls announcements are the most important economic indicators and will set the tone for wider markets. Any signs of a reversal in the recovery will send the USD lower once again with new highs on GBPUSD and EURUSD likely in the aftermath.
Jobless claims are due at 13.30
Away from dollar markets, things remain relatively quiet although commodity currencies remain supported by improved sentiment in manufacturing sectors.
Have a great day.