Market Brief: Bank hikes but sterling plummets

03 Nov 2017

Kevin Musisi

Dealing team

The MPC voted 7-2 in favour of raising the Bank Rate 25bps to 0.50%, marking the first hike in borrowing costs since 2007.

Today's data releases
  Key levels
09:30 UK services PMI   Support Resistance
12:00 Non-farm payrolls GBP/USD 1.3030 1.3340
12:30 US services PMI GBP/EUR 1.1065 1.1290

Market overview

Where else do we begin today but with yesterday’s landmark decision from the Bank of England to raise rates for the first time in a decade? To recap, the MPC voted 7-2 in favour of raising the Bank Rate 25bps to 0.50%, marking the first hike in borrowing costs since 2007. Members Cunliffe and Ramsden were the two dissenters on the committee, preferring to keep rates unchanged at 0.25%, citing insufficient evidence that wage growth would pick up in line with the Bank of England’s forecasts. In the accompanying quarterly Inflation Report, the Bank still saw CPI inflation at an above-target 2.15% in three years’ time, which might imply that a slightly steeper path for interest rates may be necessary than the two additional two hikes that the forecast was conditioned upon, following today’s decision.
Despite the rate hike, Sterling fell on the announcement most likely due to the MPCs commitment to “monitor closely the incoming evidence” on how Brexit negotiations progress and that it stands ready to respond to changes in the economic outlook. Sterling’s woes didn’t end there as in the press conference that followed, Mark Carney did not give an explicit steer that more hikes than financial markets expect could be needed. Furthermore, he also stressed the need for rates rises to be gradual and limited. As I type, Sterling is currently trading at 1.3040 and 1.1200 against the Dollar and Euro respectively – a near 2% fall in last 24 hours.
Elsewhere, President Donald Trump nominated Federal Reserve Gov. Jerome (Jay to his friends) Powell to succeed Janet Yellen as chair of the U.S. central bank, a move that is expected to ensure continuity in the Fed's monetary policy strategy. Powell, 64, who joined the Fed in 2012 and who has voted with the majority on all rates decisions so far, is expected to stay the gradual course of monetary tightening charted by Yellen beginning with the first post-crisis interest rate increase in December 2015. 

The day ahead

Looking ahead today, we begin with UK services PMI data at 9.30am before we cross to the US for the non-farm payrolls due at 12.30pm. Analysts are divided on how strong the post-hurricane payrolls will rebound from the 33k fall last month but consensus currently lies at an expectation of 313k jobs to be added to the economy with no change to the unemployment rate of 4.2%

Thought of the day

Remember, remember the 5th of November… Over the weekend many people will be putting their winter woollies on to brave the November cold to go and see a fireworks display. As they enjoy the fireworks, most probably won’t be thinking about the beginnings of the annual event: to commemorate the failed gunpowder plot back in 1605, when Guy Fawkes was prevented from blowing up the houses of parliament. This anniversary is celebrated each year with bonfires, fireworks and sparklers aplenty! If the interest rate hike yesterday means you need to hatch a plot to manage your currency risk, then the Investec dealing desk can help and provide a bit of sparkle along the way!

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