Sterling has slumped badly against the euro today in the wake of the MPC’s minutes, which were received particularly poorly by the market. We might wonder why the response has been so strong given that no one actually expected to see an additional MPC member vote in favour of an interest rate rise.
The thing that has disappointed investors today is the dovish tone of the minutes. The BoE’s priorities have yet again been made clear; UK growth must come before they hit consumers with higher borrowing costs. Allusions to “an uncertain economic outlook” stuck out like a sore thumb. The wait-and-see mode stands firm, and last week’s fall in UK inflation has put the doves back in control.
Data has been mixed over the past month or so; manufacturing and services data was encouraging but the retail and consumer confidence side remains at very low levels. UK monthly retail sales data will be released tomorrow, good news is not expected but it is badly needed if sterling’s fortunes are to improve.
Next week UK first quarter GDP is released; without a steady figure here the sterling could have further to drop. The market has now pushed back expectations of the next BoE rate rise to November. Compare this to expectations of another ECB rate rise in July and you can see why sterling is at such low levels against the single currency.
Market thinned markets have also exaggerated sterling’s drop against the euro.
The move has also come amid an already euro-positive correction of Monday’s wave of risk aversion. However, on a more positive note for sterling, the minutes do suggest that last month’s surprise drop in inflation was just a blip in an uptrend that is likely to see CPI exceed 5% this year. If UK growth does improve in coming months, then amid such price pressures we could yet see expectations of a BoE rate rise brought forward to the summer. One thing seems clear though, any decent sterling/euro rate (say…1.18), seems a very long way away indeed.
Comments are always welcomed.
Richard Driver
Analyst – Caxton FX
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