Confidence in global growth conditions remained weak on Thursday with markets looking to assess the relative outlook between major economies. In this context, there was a relatively favourable reaction to the Bank of England policy decision as Governor Carney stated that interest rate hikes should not be ruled out. The dollar also continued to perform well with defensive demand in evidence while the Euro and commodity currencies remained out of favour.
Pound Sterling (GBP)
There were no substantive developments from Prime Minister May’s EU talks with dialogue set to continue ahead of next week’s parliamentary debate. The Bank of England held interest rates at 0.75%, in line with forecasts. 2019’s GDP growth forecast was cut to 1.2% the lowest since 2009, but inflation was expected to be slightly higher given the very tight labour market and higher wages. Governor Carney warned markets that interest rates were still likely to increase if Brexit uncertainty was resolved. After a brief slide, Sterling recovered to post net gains with GBP/USD near 1.2950 while GBP/EUR moved to above 1.1400.
The EU Commission downgraded the overall 2019 Euro-zone GDP growth forecast to 1.3% from 1.9% previously while the Italian projection was cut to 0.2% from 1.2% and 2020 projections were also cut. The downgrades further eroded confidence in the outlook and there were significant political tensions between Franc and Italy which helped push Italian bond yields higher. EUR/USD initially remained under pressure and secured only a limited recovery from 1.1325 with fresh selling interest above 1.1350. Scandinavian currencies continued to weaken under the weight of concerns over the European growth outlook.
US labour-market data had little impact and comments from Federal Reserve speakers were broadly neutral with expectations that interest rates would be held steady in the short term. Expectations of weak global growth and dovish central bank policies continued to underpin the dollar, especially with commodity currencies remaining under pressure. There were cautious remarks on US-China trade talks from White House Economic Adviser Kudlow and no plans for President Trump to visit China which undermined risk appetite. The dollar faded slightly later in the session with USD/JPY again unable to hold above the 110.00 level.
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