London Session Forex Recap – August 4, 2016

  • Euro Zone retail PMI: 48.9 vs. 48.5 previous
  • BOE: 9-0 vote to cut main rate from 0.50% to 0.25% as expected
  • BOE: 6-3 vote to expand asset purchases by £60B to £435B vs. steady at £375B expected
  • BOE: 8-1 vote to purchases up to £10B worth of corporate bonds
  • BOE: “a majority of members expect to support a further cut in Bank Rate to its effective lower bound
  • BOE: easing measures “have scope for further action
  • BOE: easing measures come “at the cost of a temporary period of above-target inflation

All eyes were on the pound during the morning London session, especially since the BOE delivered on a highly-anticipated rate cut and more. What else did the BOE do and how did the pound react?

Major Events/Reports:

MPC rate decision – As widely expected, the BOE’s monetary policy committee (MPC) voted 9-0 for a 25 bps rate cut, lowering the main rate to 0.25%. This is the first rate cut in seven years. What’s not as widely expected, but was touched upon by Forex Gump in his 3 Things to Remember for the Upcoming BOE Statement, were the BOE’s other easing moves.

To be more specific, the BOE, through a 6-3 vote, also expanded its asset purchase program for government bonds by £60 billion to £435B. Not only that, through an 8-1 vote, the BOE will also purchase up to £10 billion worth of U.K. corporate bonds.

These easing measures were “designed to provide additional support to growth and to achieve a sustainable return of inflation to the target,” according to the BOE. However, the BOE also acknowledged that these measures come “at the cost of a temporary period of above-target inflation.”

Below are the key points from the BOE’s decision, as well as the main takeaways from the quarterly inflation report in bullet points for easier reading. Do note that the BOE is open to further easing. In addition, the BOE also downgraded most economic indicators. The most noticeable exception was CPI, since it was expected to rise and even overshoot the BOE’s target 2.0% target.

  • 9-0 vote to cut main rate from 0.50% to 0.25%
  • a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate
  • 6-3 vote to expand asset purchases by £60B to £435B
  • 8-1 vote to purchases up to £10B worth of corporate bonds
  • Easing measures come “at the cost of a temporary period of above-target inflation
  • This package contains a number of mutually reinforcing elements, all of which have scope for further action
  • The MPC can act further along each of the dimensions of the package by lowering Bank Rate, by expanding the TFS to reinforce further the monetary transmission mechanism, and by expanding the scale or variety of asset purchases
  • If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.”
  • Q3 GDP expected to grow only by 0.1%
  • GDP forecast for 2016 maintained at 2.0%
  • GDP forecast for 2017 downgraded from 2.3% to 0.8%
  • GDP forecast for 2018 downgraded from 2.3% to 1.8%
  • As noted earlier, the BOE expects CPI to accelerate
  • CPI forecast for Q3 2016 maintained at 0.8%
  • CPI forecast for Q3 2017 upgraded from 1.5% to 1.9%
  • CPI forecast for Q3 2018 upgraded from 2.1% to 2.4%
  • BOE expects the jobless rate to worsen to 5.4% by 2017 and then 5.6% by 2018
  • Business investment expected to contract by 3.75% in 2016, 2% in 2017, and 4.75% in 2018
  • Household spending expected to weaken: +2.5% in 2016, +1.0% in 2017, and +0.75% in 2018

Risk-taking aplenty – The risk-on vibes from the earlier Asia session carried over into the European session. However, it wasn’t until the BOE announced its monetary policy decision that the risk-on party really started.

The pan-European FTSEurofirst 300 was up by 0.78% to 1,332.50, the blue-chip Euro Stoxx 50 was up by 1.13% to 2,942.50, the DAX was up by 0.96% to 10,268.00, and the U.K.’s FTSE 100 really like the BOE’s decision since it was up by 1.38% to 6,726.10.

It also looks like the risk-on party will carry over into the U.S. session, since U.S. equity futures are in the green. The S&P 500 futures index was up by 0.29% to 2,163.25 while the Nasdaq futures index was up by 0.15% to 4,735.25

Major Currency Movers:

GBP – The pound already showed some signs of weakness at the start of the session, likely because of last-minute preemptive positioning. It then got hurled off a cliff when the BOE announced that it was cutting rates and more (and is ready to do even more if needed).

GBP/USD was down by 141 pips (-1.05%) to 1.3147, GBP/AUD was down by 238 pips (-1.36%) to 1.7259, GBP/NZD was down by 282 pips (-1.52%) to 1.8301

NZD – The pound wasn’t the only major mover during the session. Forex traders also pounced on the higher-yielding Kiwi, thanks to the risk-on party.

NZD/USD was up by 35 pips (+0.49%) to 0.7184, NZD/CHF was up by 36 pips (+0.53%) to 0.6997, NZD/CAD was up by 34 pips (+0.37%) to 0.9390

Watch Out For:

  • 12:30 pm GMT: U.S. initial jobless claims (265K expected, 266K previous)
  • 2:00 pm GMT: U.S. factory orders (-1.9% expected, -1.0% previous)

See also:

Asian Session Forex Recap

U.S. Session Forex Recap

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