BoE hikes UK interest rate hike but Pound exchange rates whipsaw
In spite of Bank of England (BoE) policymakers voting unanimously to raise interest rates the GBP/EUR exchange rates whipsawed, ultimately ending lower at around £/€1.1224.
Although the Pound initially rallied in response to the rate hike this strength proved rather short-lived.
As comments from BoE Governor Mark Carney indicated that interest rates are now likely to remain on hold for some time to come the mood of GBP exchange rates quickly soured once again.
The high odds of a rate hike that had already been priced into the Pound also helped to limit its potential for gains, to the detriment of the GBP/EUR exchange rate.
While the Eurozone producer price index showed an uptick on the year, meanwhile, the appeal of the Euro remained somewhat muted.
While all nine members of the Monetary Policy Committee (MPC) voted in favour of an interest rate hike the outlook of the BoE appears to remain cautious.
As Carney stressed the need for policy to ‘walk not run to stand still’ this encouraged bets that another interest rate increase is not on the table any time soon.
Andreas Wallström, Chief Analyst at Nordea Markets, noted:
‘It is not a particularly hawkish signal, despite the unexpected uniformity in the votes.
‘The hike was broadly priced in beforehand and with a dovish wrapping the GBP reaction is muted. It doesn’t bode well for the GBP that even a unanimous hike cannot really get the momentum in Sterling going.
‘Once inflation disappoints even more (than what we have already seen), prospects of hikes will no longer be able to counter Brexit-risks. We would like to see EUR/GBP above 0.90 again, before considering a positive stance on GBP.
‘Brexit-risks will continue to rise as time works as a magnet ahead of March 2019. A relatively hawkish stance from Bank of England is likely needed for the GBP to fare decently well, in case of no news from the Brexit-front.’
The GBP/EUR exchange rate could still recover some ground ahead of the weekend, however, if July’s UK services PMI proves positive.
Any sign of resilience within the service sector would give investors fresh cause for confidence in the Pound.
As the service sector is responsible for the majority of UK economic activity a solid showing here could boost hopes that growth continued to recover at the start of the third quarter.
On the other hand, signs of slowing growth would leave the GBP/EUR exchange rate vulnerable to further losses.
With Brexit-based uncertainty likely to mount further in the months ahead the Pound may struggle to find any significant rallying point.
Confidence in the Euro could strengthen on Friday morning if June’s Eurozone retail sales data shows an improvement on the month.
Forecasts point towards a solid uptick of 0.4% after May’s stagnant sales, something which could encourage EUR exchange rates to strengthen.
After the disappointing nature of recent Eurozone manufacturing and growth data investors are hoping to see signs of resilience in consumer spending.
If retail sales fall short of forecast, though, this is likely to underline market concerns that the currency union is struggling to regain the economic momentum lost at the start of the year.
Focus will also fall on the finalised raft of Eurozone services PMIs for July, although no change is expected from the provisional readings.
As long as the Eurozone service sector demonstrates signs of strength the downside potential of the single currency is likely to be limited.
However, if the service sector data sees a downward revision similar to the corresponding manufacturing figures then the appeal of the Euro is likely to diminish further.
Rising global trade tensions may also limit the potential gains of EUR exchange rates, especially if the Trump administration expresses any discontent over trade relations with the EU.
Source: ExchangeRtaes – BoE Hikes UK Interest Rate Hike But Pound Exchange Rates Whipsaw
