Sterling plunges over one percent on dimming BoE rate hike chances

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2 May 2018

thomasdodds

Sterling tanked by over one percent against the US Dollar on Tuesday, with the currency crashing back below the 1.36 mark for the first time since mid-January.

Y
esterday’s very weak macroeconomic data release in the UK extended the currency’s losses to over 5% in a matter of just two weeks. The April manufacturing PMI slipped to its lowest level in seventeen months, the latest in a prolonged string of economic news that has decimated the chances of another interest rate hike from the Bank of England at its MPC meeting next week. Financial markets are placing around a 15% chance of a rate increase this month, the fading probability of which has weighed heavily on the Pound in the past few trading sessions.

Mercifully, the construction PMI surprised to the upside this morning. What will prove more significant, however, will be tomorrow morning’s services PMI, given the sector’s much larger contribution to the overall GDP.

Federal Reserve to hold rates, hint at June hike

The US Dollar marched into positive territory for the year, appreciating against almost every currency ahead of tonight’s Federal Reserve meeting. With the US economy powering ahead in 2018 and most other major economies appearing to be stalling, investors are refocusing on the widening in interest rate differentials between the US and every other country.

We do not expect any change in policy from the FOMC tonight, but instead the markets will potentially be looking for clues that would suggest another hike could be on the horizon in June. We expect the bank’s statement to note the solid economic fundamentals in the US, while reiterating its confidence that inflation would return to target over the medium term. Absent any surprises, today’s meeting could be a relatively low key one, with Friday’s nonfarm payroll report likely to be a bigger market mover.

Euro slips below psychological 1.20 level

A broadly stronger US Dollar sent the Euro below the psychological 1.20 level yesterday for the first time since mid-January. With much of the European markets closed due to the Labour Day bank holiday, the move was driven almost exclusively by underlying trends.

Today bodes to be a much busier day in the Eurozone, with a string of economic data releases on the docket. Preliminary first quarter GDP data is expected to show that growth in the Euro-area economy slowed to 0.4%, while the manufacturing PMI and unemployment rate could shift the common currency.