Sterling on the front foot

Unlike the Fed earlier this week and the ECB last week, the Bank of England kept interest rates on hold at its latest monetary policy meeting, and said it would continue to adopt a cautious and gradual approach to lowering them. This, together with stronger than expected UK retail sales data released earlier this morning, is supporting sterling, which is essentially trading at fresh 2024 highs against both the dollar and the euro at around $1.3330 and £0.8385 respectively. The euro remains firmer against the dollar post the Fed meeting, trading at around $1.1180, just shy of its year to date high of $1.12 in July.

In government bond markets, UK 10-year yields closed around 5bps higher yesterday post the BoE rate decision while 2-year yields ended flat. US and German 10-year yields were broadly unchanged on the day but 2-year yields nudged down. Equity markets, meanwhile, had a very positive session, buoyed by the Fed’s rate cut and its accompanying forecast of a soft-landing for the US economy, with European stocks gaining more than 2% and the S&P 500 closing at a new all-time high on the back of gains of almost 2%.

The Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to keep interest rates at 5% yesterday, with the lone dissenter voting for a 25bps cut to 4.75%. In terms of the outlook for rates, the MPC said – absent “material developments” – a “gradual approach to removing policy restraint remains appropriate”, while reiterating that policy will need to “remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target have dissipated further.” The market still expects the MPC to cut by 25bps at its next meeting in November, but has pared back the chances of another quarter-point cut in December (to around 60%).

Retail sales data released in the UK earlier were stronger than expected. Sales volumes rose by 1% in August, following an upward revised gain of 0.7% in July, and over the three months to August increased by a healthy 1.2% on the preceding three months (March-May).

The Bank of Japan kept interest rates unchanged at 0.25% following its latest meeting,  after hiking in July, but gave little away about when it might raise rates again.

It’s a very quiet end to the week economic-data wise, with little or nothing of note scheduled for release.