Forex trading – sterling skids lower as monetary policy divergence bites

Sterling skidded below $1.30 again on Tuesday, hit hard in Asian trading on bets the Bank of England is ready to open the taps on more stimulus just as the Federal Reserve is eyeing a rate hike.

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Bank of England

 

The pound was sold off as investors speculated that the Bank of England is ready to launch more easing measures if required.

Last week the Bank’s Monetary Policy Committee (MPC) committed to an additional £60 billion in QE, supplemented by a £10 billion corporate bond buying splurge. It also cut its main interest rate to 0.25%, a new record low, and launched a new scheme – Term Funding – designed to encourage banks to lend by offering them cash at close to the Bank Rate.

But should data disappoint, this will be boosted. The MPC said it was likely that further easing would be required if the data matches its August inflation reports.

This view was supported on Tuesday by Ian McCafferty, a member of the MPC.

"If the economy proves to have turned down in line with the initial survey signals, I believe that more easing is likely to be required, but that can easily be delivered in coming months," he wrote in The Times.

"Bank rate can be cut further, closer to zero, and quantitative easing can be stepped up," he added.

So what about the data?

Retail sales figures from the UK delivered some post-Brexit cheer. Total sales climbed by 1.9% in July, according to the British Retail Consortium and KPMG report, as warmer weather spurred buying.

But it looks like that this was driven by smaller items – alcohol and food – while the big ticket purchases are being put off.

PMI readings have been very weak, with the manufacturing, services and construction sectors all showing signs of stress. Official manufacturing production figures show output decline 0.3% in June from a month before, coming off a 0.6% drop in May.

The jobs market could be where the Brexit-driven cracks really show up.

Heading into July on the up, it looks like British employers have pulled back sharply since the referendum. Whether this is a temporary setback or the start of a prolonged slump is harder to assess, but the Bank of England has warned that the vote to leave the EU will severely impact jobs and growth.

Contraction in permanent places accelerated at its fastest pace since 2009, with REC chief executive Kevin Green saying the jobs market “suffered a dramatic freefall in July”.

Trade data for June showed a rise in imports and exports but the deficit widening by nearly £1 billion to £5.1 billion.

Federal Reserve

 

While the Bank of England has its eyes fixed on loosening policy, the Fed is heading towards a rate hike – sooner or later.

Friday’s stellar non-farm payrolls data made it two in a row for the US jobs market, indicating the world’s largest economy is in rude health. Meanwhile the Atlanta Fed has recently raised its GDP forecast for the third quarter to a punchy 3.8%.

This is fuelling hopes of another a rate rise from the Fed, which had all but rowed back completely from the prospect earlier in the year.

Since July’s job numbers, the chances of the Fed raising rates by the end of the year have improved, with a near 50/50 chance, according to CME’s Fed watch tool.