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August 2017

Sterling dives after Bank of England (BoE) growth downgrade – a correction is likely

Published: Tuesday 15 August 2017

  • Sterling dives after Bank of England (BoE) growth downgrade – a correction is likely
  • Aussie retail sales improve – but miss forecast
  • US Employment data is today’s big thing
By David Johnson
The Bank of England (BoE) appeared to be edging towards an interest rate hike after three of the reduced eight member Monetary Policy Committee (MPC) voted for that at their previous meeting, but only two voted that way this time. When the MPC met yesterday, they also downgraded the bank’s growth forecasts to 1.7% this year; and for 2018 it expects growth of 1.6%, down from their previous estimate of 1.7%. Those downgrades would still see the UK economy growing at a healthy pace – and many countries would give their right arms for growth like that – but the market perception is negative and the Pound was hit hard.
Sterling fell a cent against the Euro and a similar amount against the US Dollar, but I would caution that the BoE has not been good at forecasting in the past. Economists tend to break their forecasts down into two parts: Part 1, the forecast; and Part 2, the reasons why they were wrong on their previous forecast. This announcement was no exception. What these latest events do is remove any chance of a short term interest rate hike – and that does damage the Pound amongst yield-starved investors.
Overnight, we heard that Australian Retail Sales improved in Q2, but not as much as some had forecast. Analysts are taking that as a sign that improvements in the labour market are finally having an impact on consumer activity.  However, whilst the Reserve Bank of Australia’s statement on monetary policy was quite upbeat in tone, there are still concerns over the strength of the Australian Dollar and its impact on the general economy. The Sterling – Australian Dollar rate held up well, while the Pound slipped elsewhere.
Today’s major event is the release of the July employment report in America. Growth of around 180,000 jobs is the main forecast for the Non-Farm Payroll count and the unemployment rate may ease down to 4.3%, which is as near to full employment as you are ever likely to see in such a large country, where the geographic coincidence of vacancies and skills will always be slightly awry. The US Dollar has been weakening on political concerns, on commodity revivals and on uncertainty over the Federal Reserve’s policies. Perhaps a good solid employment report will give it a bit of a fillip?
We will also get Canada’s employment data. That too is expected to be in positive territory, but not quite so strong as the US. At 6.5%, given the sparsity of Canada’s population and the polarisation within certain areas, is also tantamount to full employment, so increased wage growth is highly likely at some stage.  The Canadian Dollar is stronger against the embattled Pound this morning and may strengthen further this afternoon.
And I don’t know if you have seen the story of the prisoners who broke out of Walker County Jail in Alabama, but it is very clever. They saved up peanut butter from their sandwiches and fashioned it to change the numbers on a control panel used by the guards. Then they asked a newbie guard to open a cell door and they hit the altered button to open a door to the outside world. 12 escaped, but 11 have been recaptured. For those who like detail, I am sorry, but I don’t know if it was smooth or crunchy… sorry. 


A guy dashes into a bar and says to the barman, “Give me three shots of Bourbon and a beer”
The barman sees that he is in distress, so he hurries about getting the drinks and lines them up on the bar. The guy necks all three whiskeys and takes a big slug of the beer before sighing.
He looks at the barman and says “Thanks, mate, but I really shouldn’t be having these with what I’ve got.”
“Don’t say that,” says the Barman. “What is it that you’ve got?”
“About one pound fifty,” says the drinker.  
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