Bank of England end Sterling’s recovery

5 February, 2016

Rob Bastin

What a difference a day makes in the currency markets. On Wednesday morning Sterling exchange rates were still enjoying positive gains, partly recovering from the recent losses. An afternoon surge in EUR/USD saw GBP/EUR fail a change in trend with the stronger Euro starting to push rates back down again, and by close of business yesterday losses had reached nearly 3 cents in just 24hrs. This movement followed the latest Bank of England interest rate decision announced Thursday lunch time. All policies were unchanged as expected but the crucial factor was the change in the MPC votes for the hold on rates. For 6 months Ian Mccafferty has been on his own voting for a rate hike in the UK, with the other 8 members voting for no change. Yesterday’s minutes showed that he has now back tracked on this vote and that the MPC were in fact unanimous in their decision not to hike interest rates.

The significance of this is that the markets now have just a 1% expectation of a rate hike this year, compared to over a 90% expectation just 6 months ago. The re-pricing of this timeframe, coupled with a looming EU referendum should support an even weaker pound for the coming months, particularly against the Euro which is slowly recovering from its oversold levels in 2015. UK growth for 2016 was also downgraded from 2.5% to 2.2% however the Bank of England did seem to rule out the chance of a rate cut this year, but this is barely a silver lining on what is a very dark cloud at present.

Today the focus is back onto the US Dollar that has been pulling back significantly over the last week after such aggressive appreciation at the turn of the year. Markets have been pricing out the possibility of a previously expected rate hike in March, due to a string of weaker data releases. All eyes will therefore be on the all important unemployment figures and Non-farm payroll announced this afternoon at 1:30pm. Dollar buyers should take interest as a weak figure could see a short term buying opportunity, but a strong figure could ignite the Dollar recovery so acting quickly could prove to be the best approach.

Remember you can fix your rate for up to 1 year in advance with a 10% deposit, something which is becoming more and more popular it this declining market.