Sterling slides post UK rate cut
The Bank of England’s Monetary Policy Committee (MPC) voted by the barest majority (5/4) to lower interest rates by 25bps to 5% yesterday, which wasn’t totally unexpected although it wasn’t fully priced in by the market. Sterling had weakened ahead of the MPC meeting and has lost further ground following the rate cut, falling to around $1.2710 against the dollar and to around £0.8490 vis-à-vis the euro. The latter, which dipped to an intra-day low of just under $1.0780 against the US currency yesterday, is trading at around $1.08 this morning, leaving it about half a cent lower on the week so far. Today sees the release of the key jobs report in the US, which could have a bearing on the dollar’s fortunes over the next while.
UK government bonds led a further decline in yields generally yesterday, with 2- and 10-year gilt yields ending about 8-10bps lower on the day. Equivalent US and German yields fell by only slightly less, with the US 10-year yield now below 4% for the first time since early February this year and at 3.95% is down around 75bps from its 2024 peak at the end of April. Meanwhile, equity markets had a poor session, not helped by some weak economic data (including a further decline in the ISM index of US manufacturing activity in July), with European stocks off more than 2% and main US indices shedding 1-2%.
The MPC in its statement accompanying yesterday’s UK rate cut said “it is now appropriate to reduce slightly the degree of (monetary) policy restrictiveness”, given the impact from past external price shocks has abated and the risk of “persistence in inflation” is declining. While it noted that GDP growth has been relatively strong recently, it said “the restrictive stance of monetary policy continues to weigh on activity in the real economy, leading to a looser labour market and bearing down on inflationary pressures”. Regarding the outlook for rates, the MPC said “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target…have dissipated further”, adding that the “Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting”. For its part, the market is fully priced for another 25bps cut at the next but one meeting in November and sees rates below 4% by the middle of next year.
Today’s employment report in the US is expected to show the economy added 175k jobs in July, according to the consensus forecast, following a gain of 206k in June, with the unemployment rate seen holding at 4.1% and the year-on-year increase in average hourly earnings expected to slow further to 3.7% from 3.9% in June. Other US data due today includes factory orders, while there’s little or nothing of note elsewhere.