Dovish rate rise sends pound tumbling

The Bank of England voted unanimously to raise interest rates by 25 bps to 0.75%, the highest level in a decade.

The Bank of England voted unanimously to raise interest rates by 25 bps to 0.75%, the highest level in a decade. Following what appeared to be a hawkish rise, given the 9 -0 vote split, the pound rallied 0.3% to a session peak of $1.3124. However, the gains were short lived, with cautious Carny quickly bringing the pound 0.8% lower. 

Bank of England Governor Mark Carney cautioning the market not to get ahead of itself and highlighting short term factors as a reason not to hike rates further, weighed on demand for the pound. His comments ensured that the markets know that a November rate hike is well and truly off the table. In short this is a one and done dovish rate rise, given the Brexit uncertainties that lay ahead in the near term.

Raise to reverse?
It is also necessary to keep in mind that the BoE are carrying out their economic assessment under the pretense of a smooth Brexit, not factoring in any worst-case scenario, no deal Brexit. Given recent political developments and the fact that there are just a few months to go to the October deadline and no deal has been brokered, one wonders whether the central bank should have started to adopt a less optimistic scenario for the base case. However, this does support the theory that the BoE was looking to hike rates, to give themselves some breathing space to loosen policy should a hard Brexit require this.

The pound dropped to a session low of $1.3016 following Carney’s caution, however it has since clawed back some of the lost ground at $1.3050. Given that no more rises are in the picture until Q3 2019 and the upcoming Brexit turmoil, the pound could struggle to make any significant moves higher. Pound traders will now look towards the services pmi and US non-farm payrolls.

Service sector pmi to send pound lower?
The pound could find itself in out of favour once again tomorrow. The service sector pmi is expected to have slipped in July to 54.7 from 55.1. Given the dominance of the service sector, it doesn’t bode well for the UK economy – and worse following a rate hike. Should service sector activity underwhelm, then pound could find itself heading back towards $1.30. An impressive non-farm payroll figure tomorrow afternoon and the pound could be looking to test $1.2958 (low 19 July). 

FTSE sinks on trade concerns
The FTSE hasn’t been able to capitalise on the weaker pound as trade war tensions are once again dominating market sentiment. As tit or tat measures and have reignited fears of a full-blown US-China trade war, investors are taking cover. Flows out of higher risk assets and into safer havens have dominated movements this session, with equity indices down across the board and havens such as the yen is seen moving higher.


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