Sterling under pressure

The dollar’s post-Fed meeting weakness has proved very short-lived, with the currency more than recovering the ground it had lost against the euro and sterling to trade at around $1.08 and just below $1.26 respectively this morning. The pound has also slipped against the euro, to around 85.9p, as it is under additional pressure following yesterday’s Bank of England MPC meeting, at which interest rates were left on hold (as expected) but with no calls for a rate hike this time around and one vote again in favour of a cut.

UK rate cut expectations have firmed with the market now seeing an almost 90% chance of a 25bps reduction at the next but one meeting in June and 50bps worth of cuts priced in by September. This has contributed to a decline in UK bond yields, with 2-year yields closing about 5bps lower yesterday and edging down again this morning.

The Bank of England MPC voted 8-1 to keep interest rates on hold (5.25%) at its latest meeting. The two dissenters who voted for tighter policy at the February meeting abandoned their call for a rate hike, while the other dissenter in February again voted for a 25bps cut. In light of still elevated wage and services price inflation, the MPC reiterated that monetary policy would have to remain restrictive for some time yet. It did note though that policy could remain restrictive even if interest rates were to be cut, given that they are starting from an already restrictive level, and indeed in a Financial Times interview reported this morning, BoE Governor Andrew Bailey said rate cuts “are in play” at future meetings.

Retail sales data released in the UK earlier this morning showed volumes were flat in February following a very sizeable increase of almost 3.5% in January. Looking at the underlying picture, sales volumes in the three months to February were still almost 0.5% lower than in the three months to November.

It is quiet enough data-wise for the rest of the day with the IFO Index of German business sentiment the main release of note, while there are a number of ECB and Fed members due on the wires.