The interest rate divergence will continue to widen, not because of expected USA rate hikes, but rather the European Central Bank (ECB) and Bank of Japan (BOJ) going deeper into negative rates.
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“The Bank of England has hit a flawless “High Five” at today’s meeting, over-delivering against market expectations and bucking the recent trend of central banks disappointing”, said JP Morgan Asset Management portfolio manager, Nick Gartside.
(Open): UK shares continued to rise following Thursday’s interest rate cut, but RBS shares fell after it reported worse-than-expected losses.
Still, having broken below its trend line support since its recovery from a three-decade low of $1.2798 hit on July 6, the currency is seen at risk of testing that low again, some analysts said.
The Bank’s governor, Mark Carney, said that a majority of the nine-member Monetary Policy Committee (MPC) backed another cut if subsequent data showed the economy was deteriorating.
In afternoon trading, the Dow Jones industrial average was down 21.75 points, or 0.12 percent, at 18,333.25; the S&P 500 0.71 point, or 0.03 percent, lower at 2,163.08, and the Nasdaq Composite was up 5.81 points, or 0.11 percent, at 5,165.55.
Sterling went in the opposite direction, tumbling 1.5%, or almost 2 cents, against the U.S. dollar to stand at 1.31. Germany factory orders numbers for June, the latest trade balance reading for France and the latest United Kingdom house price data are the main data this morning before the market turns its eyes to the July employment report in the USA at 1.30pm GMT. The BOE cut its benchmark interest rate to a new low of 0.25%, relaunched a government bond-buying program and it expanded it into corporate bonds, and set up new, cheap funding for banks.
“Investors are sitting tight”, said Jack Ablin, chief investment officer at BMO Private Bank.
He also rejected boosting the economy though “flights of fancy” such as “helicopter money”, which is essentially handing out central bank money with no strings attached.
“Today’s decision will test the limits of monetary policy which many would argue ran out of runway some time ago”, Bill Michael, global head of financial services at KPMG said. Economists expect the data to show the US economy added 175,000 jobs July, with the unemployment rate dipping to 4.8 percent from 4.9 percent.
While the first half of 2016 saw relatively strong growth, this is expected to fall in the second half.
The BoE maintained its 2.0-percent economic growth forecast for 2016.
The Australian and New Zealand dollars, which have suffered in the past week from worries that central banks globally would not meet market expectations for further policy easing, rose around half a percent against the US dollar.
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Brent crude, a benchmark for worldwide oil prices, added 1.19 dollars (90p), or 2.8%, to 44.29 dollars (£33.79) a barrel in London.
