Dollar remains on front foot for now
The dollar remains on the front foot for now as it extends its post-Fed meeting gains. The Bank of England MPC left policy on hold yesterday, as expected, and remains cautious about the prospects for further rate cuts, which also came as no surprise to markets. Retail sales data released in the UK a short while ago matched the consensus forecast, but public sector borrowing data, released as well, were ahead of expectations. The latter is weighing on sterling, which has weakened to around £0.8715 against the euro and to $1.3515 against the dollar. The euro is well off its week’s highs against the US currency, trading at about $1.1775 this morning.
US bond yields nudged up further yesterday, having spiked higher following Wednesday’s Fed meeting, increasing by 2-4bps across the curve. German and UK yields played catch-up with the jump in US yields, increasing by 5-8bps in the 10- and 30-year areas of the curve. Equity markets had a positive session, with European stocks rallying by 1.5% and the S&P 500 in the US closing at new record highs on the back of gains of around half a percent.
According to this morning’s UK data, public sector net borrowing was £18.0 billion in August, £3.5 billion more than in August 2024 and the highest August borrowing for five years. Borrowing for the first five months of the the current financial year (April-August) was £83.8 billion, some £16 billion ahead of the corresponding period of 2024. Meanwhile, retail sales volumes rose for a third consecutive month in August, increasing by 0.5% from July, though spending over the June-August period was still slightly lower than in the three months to May.
The Bank of England MPC voted 7-2 to keep interest rates unchanged at 4% with the two dissenters voting for a 25bps cut to 3.75%. The MPC remains cautious about the outlook for further rate cuts, saying “the timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease.” The MPC also voted to reduce the Bank’s stock of gilts by £70bn during Oct 25-Sept 26, with active gilt sales of £21bn (though the share of long-dated bond sales will be reduced).
It is a quiet end to the week in terms of economic data with little or nothing of note due for release today.