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The pound has dropped to a five-month low this morning, touching $1.2305 against the US dollar.
Sterling weakened due to expectations that UK interest rates will not rise as high as previously expected, ahead of the Bank of England announcement at noon.
Plus, the US dollar is being lifted from expectations that US interest rates have not yet peaked., following the Federal Reserve meeting last night.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, argues that the BoE will raise interest rates at noon today: "Up until yesterday, the expectation was an almost certain 25bp hike from the BoE at today’s meeting, but yesterday’s shocker inflation data has shaken these expectations. In fact, no one, and even less the BoE chief Bailey himself, was expecting to see softer inflation in Britain last month, when oil prices spiked and sterling fell. Therefore, the surprising nature of yesterday’s data release should prevent the BoE from announcing a surprise rate pause today.
Because:
• Rising energy prices, and falling sterling hint at potentially higher inflation in the foreseeable future,
•Before yesterday morning, investors were pretty convinced that the Bank of England would raise interest rates today, for the 15th time in a row."
But Wednesday’s surprise fall in UK inflation, from 6.8% to 6.7%, has shaken the City, leaving traders – and businesses and households across the country – unsure what to expect from the BoE at noon today.
The money markets are currently indicating that the odds of a rate rise, or a hold, are roughly 50% each. That suggests the Bank’s monetary policy committee will have a fierce debate at this month’s meeting over whether to pause their hiking cycle today, or not.
Many analysts think we will get another rate hike today, taking borrowing costs to a 15-year of 5.5%.
Not all, though. Goldman Sachs yesterday predicted that the BoE will keep bank rate unchanged today, and that rates are already at their peak, after “the August inflation print surprised meaningfully to the downside.”
But other experts fear that leaving rates on hold today could be declaring victory too soon.
Kim Crawford, global rates portfolio manager at JP Morgan Asset Management, explains that a pause at this meeting “could backfire”, arguing: "The Bank of England’s decision is more finely balanced as activity data weakens more clearly, but a pause at this meeting could backfire.
"Since the last meeting, services inflation has come in lower than the Bank of England’s forecasts, and there has been clearer demand-led loosening in the labour market, but wage growth has still continued to surprise to the upside."
Last night, the US Federal Reserve delivered a hawkish pause, by maintaining US interest rates on hold but keeping the door open for future hike.
That helped to push the US dollar to a five-month high against the pound overnight, at just over $1.23.
We actually hear from 10 central banks today, including interest rate decisions in Turkey, Sweden, Switzerland and Norway, as well as the UK.
The agenda
• 7am BST: UK public finances for August
8.30am BST: Sweden’s Riksbank interest rate decision
8.30am BST: Swiss National Bank interest rate decision
9am BST: Bank of Norway interest rate decision
12pm BST: Bank of England interest rate decision
12pm BST: Bank of Turkey interest rate decision
1.30pm BST: US weekly jobless claims
We’ll be tracking all the main events throughout the day ... |
| | | Katharine Viner | | Editor-in-chief, The Guardian |
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