Market Blog

4 August 2017

Carney’s Carnage

Yesterday the pound tumbled as the Bank of England remained firmly in the dovish camp. The report showed no change in rates but forecasted lowered growth projections for the next two years while also highlighting concerns about the potential impact of Brexit uncertainties. Carney and co. cut their GDP projections for 2017 to 1.7% from 1.9%, while forecasting a lower expectation for 2018 too. This was a surprise to many as they had only revised down these figures 3 months earlier. The report also showed that it expected an additional squeeze on incomes with inflation expected to peak at 3% in October while wages are expected to remain well below this, meaning further woes for the consumer.

Another stark warning issued by the BoE was that they expected investment in the UK economy to be 20 percentage points lower in 2020 than it had forecast in 2016 and before the referendum on EU membership. This was enough for traders to briskly exit the pound, with GBP/USD falling from 11 month highs back to 1.313 area, while GBPEUR slumped to 9 month lows and was down 1% to 1.1050 (0.9050). The weaker pound led to a surge in the FTSE100 index as the cheaper pound coupled with the dovish comments wiped out any fears of a rate hike in the short term.

Even with the MPC’s 6-2 split over the base rate hold decision, and Carney’s attempt in vain to portray that the markets were under-pricing the prospect of future rate rises, no-one was buying it. Markets have now pushed back their expectations for the first BoE rate hike by 4 months to Dec next year.

The US dollar has been on a gradual slide over the past few weeks and was hovering just above 15 month lows against most major currencies at the end of play on Thursday. Pressure increased on greenback yesterday after the non-manufacturing index fell to 53.9 for July, this compares to 57.4 in June and economists were predicting that figure to remain above 57. The recent slide was caused by worse than anticipated US service sector data but focus will now turn to the latest US non-farm payrolls which is expected to fall slightly from last month’s figure from 222k to 183k. The non-farm figure will be a key indicator as to whether the US economy is strong enough for the Fed to stick to its plan of one further rate hike this year.

 

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