Another Surprise Rate Cut
The pressure remained on Sterling yesterday after hefty losses in recent days, but there was an attempt to stabilise. The Bank of England (BoE) cut interest rates again, ahead of schedule, to an all-time low of 0.10% from 0.25%. There will also be an expansion of its quantitative easing bond purchase programme by a further £200bn to £645bn; the majority earmarked for government bonds. The bank will also enlarge the current support scheme and provide support to corporate cash-flows. In its statement, the BoE commented that the Covid-19 coronavirus shock will result in a shock that is sharp and large while the UK and global financial conditions had tightened. New Governor Andrew Bailey stated that there were further options to take but remained opposed to negative rates. He also stated that a big increase in budget deficits was coming.
Sterling spluttered into life following the policy decision and global equity markets also attempted to rally, but Sterling faded again late in the European session and declined to fresh 35-year lows near 1.1450 on the Dollar and 1.0750 on the Euro. In the early hours the Pound rallied back to near 1.1700 on the Dollar and 1.0950 on the Euro. On the data front, UK Public Sector Borrowing and Consumer Inflation Expectations are due this morning.
US jobless claims increased to 281,000 in the latest week from 211,000 previously which was well above consensus forecasts and the highest reading since September 2017. The Philadelphia Federal Reserve (Fed) manufacturing survey declined to -12.7 for March from 36.7 previously, sharpest downturn on record and the lowest figure since July 2012. New orders declined sharply while delivery times slowed and employment increased slightly. Companies remained optimistic over the outlook despite a slight moderation in the 6-month outlook index, but expectations of a downturn intensified.
Dollar buying eased to some extent yesterday afternoon as commodity currencies rallied, but there was a further surge towards the European close. Although central banks increased liquidity injections, there was still a strong dollar demand to raise cash.
On a trade-weighted basis, the Greenback strengthened to fresh 3-year highs while the Euro against the Dollar declined to 3-year lows near 1.0650. The US currency corrected on Friday with the Euro near 1.0750 with markets braced for further high volatility ahead of the weekend with further position adjustment and liquidity issues inevitable during the session.
The Euro plunged to its lowest level since April 2017 against the Dollar. The pair fell to 1.0650 yesterday as investors sold everything, even safe havens like the Japanese Yen and Swiss Francs, to move their money into Dollars over continuing fears of a coronavirus-led recession in the global economy. If the risk reset gathers traction in Europe, the Dollar will likely come under pressure, allowing the common currency to extend its recovery seen during the Asian session.
On the docket today, Germany’s PPI for February will be a focus as will the Eurozone Current Account data for January. As of writing, the Euro trades at 1.0790 against its US counterpart.