Market News & Insights
3 November 2017

Pound Plummets on Dovish Hike

It was a poor day for GBP yesterday, the pound had one of its worst performing days in over a year as it dropped almost 1.85% vs the euro and over 1.5% vs the USD. The MPC voted 7-2 to raise interest rates by 25bps bringing the benchmark rate up to .50bps. There was some slight downside revisions to growth projections and little change in the inflation report, this meant the overall outcome was slightly dovish and as such GBP selling began.

In the US the dollar was little changed on the day, in fact the USD index traded slightly lower on the day but did recoup some larger losses through the session. The Greenback had faced some selling as details of the Republican overhaul of the tax code while President Trump also announced Jerome Powell as the new Chair of the Fed. The euro was firmer on the day as well, the single currency advancing despite some weaker than expected manufacturing PMI data.

Our concern all week was that a dovish rate hike from the BOE’s unreliable boyfriend, Mark Carney, would result in GBP selling. That’s exactly what we got and as a result GBP traded down over 1.6% on a weighted basis across G7 currencies and lower across the board in general. As we have highlighted the pound had built itself up a nice base of strength through much of the year, initially off the lows from Jan/Feb, but for the most part the last three months GBP has been outperforming on rate hike expectations.

The issue has always been that the UK were looking to raise interest rates from a weak position. The concern was that inflation was out of control and at 3%, a long way above the BOE’s target of 2%. From a growth perspective the UK has continued to lag behind other major economies and while headline employment figures remain strong the underlying data is somewhat concerning and in essence suggest more people are working longer hours for less money. The UK economy is heavily reliant on credit and as such the rise in interest rates will likely place greater pressures on the economy. This is likely why we saw the voting committee with only 7 votes in favour of the hike, the majority, but not a landslide. Carney also suggested the BOE would look to remain accommodative as required and struck a cautious tone in order to highlight the considerable risk to the economy with the Brexit backdrop.

There has been very little to say about the euro this week and despite ongoing headlines from Catalan/Spain, the euro has not really been too phased. There’s not very much in terms of major data and as such the single currency’s direction will likely be led by other currencies and we’ll have a focus on the technical charts instead for that. EURUSD has progressed slowly back higher and is not approaching 1.1660/80 area where we’ve marked as the first area of resistance, a break above there targets downtrend resistance around 1.1780 area which will be unlikely to break. Lows back towards 1.1575 provide firmer support, while 1.1628 offer some lighter support on the way down. EURGBP smashed out of its downtrend yesterday and any rally towards .9000/.9030 will be closely watched, this is the key resistance for now while any move lower will likely find some support at .8892.

Wednesdays ADP employment report saw 235k jobs added to the US economy and with attention now on the NFP figure, markets may be expecting something a little higher than the 313K guided by analysts. Similar to the UK the component most are watching for is the actual growth in wages expected to come in at 2.7% for October. ISM services data will also cross the wires, along with factory orders and will likely carry a little more weight that the labour market data. The USD index remains around 4 month highs. GBPUSD back at support just above 1.3000 area, a break below targets a move sub 1.2800 should GBP downside continue.