Sterling to Be Volatile as BoE Sets to Hike Rates

PAPHOS, Cyprus - Nov. 2, 2017 - PRLog -- Sterling to Be Volatile as BoE Sets to Hike Rates

Economists would call it "BoE's Super Thursday," but it looks much more like a "BoE's Total Recall" day since we are just a few hours before the first interest rate hike by the British central bank in the last ten years. Market analysts are anticipating a rise of the benchmark interest rate to 0.50%. However, they will be searching for clues in the accompanying BoE statement which will indicate if the hike is part of a plan to gradually tighten monetary policy or just a "one-off" measure.

In the US, Republicans are expected to present the tax reform bill. The US Dollar fell when a media report said that the corporate tax cut to 20% may not be permanent as it was promised by President Donald Trump. Markets expect that the President will name today the successor of Janet Yellen in the Fed's leadership. In Europe, positive data regarding manufacturing activity showed that the Eurozone economy is expanding.

Pound Sterling – UK Markets

Today, the Pound fell against the US Dollar with the exchange rate set at $1.32. Sterling dropped against the Euro with the exchange rate set at €1.13. Investors and traders have focused their attention on today's BoE monetary policy meeting.

Economists are almost certain that the Monetary Policy Committee (MPC) of the BoE will decide to raise borrowing costs from the historic low of 0.25% to 0.50%, for the first time in a decade. The last time that the MPC took a decision that affected interest rates was just after the Brexit referendum, when they were lowered to the current level in order to relieve the economy from the potential consequences of the voting result. Analysts will check the MPC's accompanying statement and how each of the members voted to find out if the rate hike will be a "one-off" measure or the start of a gradual monetary policy tightening.

An ING report said that the Pound's value could be driven higher if the BoE signals that the rate hike is part of a greater plan to increase further borrowing costs. Deutsche Bank researchers noted that the British central bank may struggle to reprice expectations for rate hikes during the next year, given the uncertainty around Brexit. IHS Markit published the UK's October Construction PMI data which surprised markets to the upside. Markit analysts noted that output growth was largely confined to house building.

US Dollar – US Markets

The US Dollar dipped against the Euro with the exchange rate set at €0.85. The US Dollar Index (DXY) fell to 94.62. Donald Trump is expected to name Janet Yellen's successor today and Republicans are going to reveal the tax reform bill.

The US Dollar fell when a report by Wall Street Journal (WSJ) said that the planned cut in the corporate tax from 35% to 20% would only be temporary. The proposed cut, if made permanent, would be too expensive under reconciliation procedures that Republicans are using to pass the tax reform bill without Democrat support. According to the WSJ report, Republicans are unable to add more than $1.5tn to the federal deficit over the next decade, making it difficult for the tax cut to become permanent.

The Federal Reserve kept interest rates on hold as it was anticipated. An ANZ report said that the Fed upgraded its description of the economy in the statement published after the monthly Federal Open Market Committee (FOMC) meeting. ANZ analysts suggest that the language used in the statement "is providing the all clear for a rate hike next month."

Euro – European Markets

The Euro climbed against the US Dollar with the exchange rate set at $1.16. IHS Markit published its manufacturing PMI data for the Eurozone countries as it was recorded in October.

Eurozone's manufacturing PMI came in a bit lower than what market analysts were anticipating, but still indicated that the Euro-bloc's manufacturing activity started the fourth quarter of the year on a strong footing. The 58.5 reading is the highest in the last six and a half years. Markit's report noted that growth of both output and new orders contributed to the rise of the PMI.

In Germany, the unemployment rate in October stood at 5.6%, in line with expectations, having reached the lowest level since 1990. Germany's manufacturing PMI in October was slightly better than anticipated. Markit's analysts said that factor production and new orders rose sharply, forcing employers to hire more people at the fastest pace since April 2011. Italy's manufacturing PMI hit a six and a half year high in October. In France, manufacturing activity was lower than expected, but still showed that the revival of the economy continued, as the fourth quarter of the year is underway.

Other Currencies – Highlights

Sterling fell against the Australian Dollar, trading just under the 1.72 AUD mark. According to data published by the Australian Bureau of Statistics (ABS), Australia's trade surplus increased in September to 1,745m AUD, much more than anticipated by economists. Exports rose by 2.9% on a month-to-month basis, while imports remained stable for a second month. Exports of metal ores contributed to the widening of the surplus.

The Pound dropped against the New Zealand Dollar, trading at 1.91 NZD. Westpac economists said in a report that they expect from the Reserve Bank of New Zealand (RBNZ) to keep its benchmark interest rate on hold in its monetary policy meeting next Wednesday. They noted that changes in the government have destabilised the country's economic outlook, and added that the RBNZ would be better off waiting and seeing how Jacinda Ardern's policies evolve.

Sterling lost ground against the Swiss Franc, trading at 1.32 CHF.

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