Pound Slides as Dovish BoE Slashes Forecasts

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Headlines

  • AUD Exchange Rates Shrugged Off Weaker Chinese Inflation – Risk appetite rebounds on mixed US data
  • Mixed US Inflation Signalled Knocked US Dollar Off Bullish Trend – Price pressures failed to pick up as forecast
  • Pound Plunged Lower After BoE Slashed Growth Forecasts – Markets doubt the odds of 2018 BoE interest rate hike
  • Unexpectedly Dovish RBNZ Left New Zealand Dollar on Back Foot – Governor Orr talks down prospect of tighter monetary policy

Australian Dollar

While the latest Chinese inflation data fell short of forecast this failed to particularly drag on the Australian Dollar yesterday. Market risk appetite generally picked up on Thursday as the initial shock of the US withdrawal from the Iran nuclear deal eased. Signs of weakness within April’s US consumer price index data also offered a boost to AUD exchange rates, even though the odds of further Federal Reserve monetary tightening remain elevated.

However, if March’s Australian home loans and investment lending figures show a decline in borrowing on the month this could weigh heavily on demand for the ‘Aussie’.

Sterling

Although markets had already effectively priced out the odds of the Bank of England (BoE) raising interest rates yesterday this still left the Pound on a weaker footing. Markets were discouraged to find that the BoE had lowered its growth forecasts, with policymakers now expecting to see growth of just 1.4% in 2018 as opposed to 1.8%. This did not give investors any cause for confidence, even as Governor Mark Carney indicated that an interest rate hike is still on the table in the coming months.

Demand for the Pound is likely to remain limited ahead of the weekend in the absence of any fresh UK data.

Euro

The European Central Bank’s (ECB) latest Economic Bulletin offered no particular surprises, limiting the impact on EUR exchange rates. While policymakers continued to sound a rather cautious note on the subject of the economic outlook this was not enough to keep the single currency under pressure. Political developments in Italy provoked some jitters, however, as the populist Five Star Movement and the League moved closer to achieving a governing alliance.

If Italy’s political deadlock ends with the populist alliance taking power this could dent the Euro, given the uncertainty this could spell for the Eurozone going forward.

US Dollar

April’s US consumer price index data proved somewhat mixed in nature, in spite of the headline annual rate picking up from 2.4% to 2.5% as forecast. As both the core and monthly inflation measures proved less encouraging this took some of the wind out of the US Dollar’s sails overnight. A slight easing in retail average weekly earnings put additional downside pressure on USD exchange rates, helping to reverse some of their recent gains.

If the University of Michigan sentiment index for May weakens this may keep the US Dollar on a softer footing.

Canadian Dollar

While the Canadian new housing price index showed some easing on the year the mood towards the Canadian Dollar remained largely positive. Oil prices remained elevated as Iranian crude supplies look set to be cut off by the collapse of the nuclear deal and re-imposition of US sanctions. This helped to support the commodity-correlated CAD even as signs from the domestic economy look less encouraging.

Further volatility is likely for CAD exchange rates tonight if the latest raft of Canadian employment data fails to impress investors.

New Zealand Dollar

Comments from Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr prompted a fresh bout of bearishness for the New Zealand Dollar on Thursday. As Orr cited concerns over the lacklustre nature of domestic inflation he signalled that the RBNZ is likely to maintain its expansionary monetary policy for ‘a considerable period of time’. With the chances of any interest rate hike looking even more distant than before the mood towards the ‘Kiwi’ soured sharply.

An uptick in April’s manufacturing PMI could help to limit the losses of NZD exchange rates in the near term.

Data Released

May 11th 08:30 NZD Manufacturing PMI (APR) 55.6
May 11th 11:30 AUD Home Loans (MoM) (MAR) -2.0%
May 11th 22:30 CAD Unemployment Rate (APR) 5.8%
May 12th 00:00 USD University of Michigan Sentiment (MAY P) 98.4

Post by TorFX

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