BOE to hold off on virus rate cut
Sterling maintained a firm tone on Friday, primarily due to underlying US dollar weakness and broke above the 1.3000 level for the first time in over a week.
With the Bank of England holding off from an immediate cut in interest rates, overall yield spreads underpinned Sterling demand. A government spokesman stated that this week’s budget would set out considerable investment which helped underpin the currency, although global events tended to dominate as volatility increased sharply. The slide in oil prices and very weak risk appetite will tend to erode Sterling support with renewed pressure for Bank of England rate cuts. The Pound currently holds firm above 1.3100 against the Dollar and 1.1515 against the Euro.
The dollar continued to decline sharply ahead of Friday’s New York open as US yields continued to move rapidly lower. US non-farm payrolls increased 273,000 for February, well above consensus forecasts of 175,000 and the January figure was also revised higher to 273,000 from 225,000 with a second successive solid increase in construction jobs. The dollar gained some relief, although the impact was limited as markets were still focused on coronavirus fears as wider volatility increased.
Against the Euro dipped lower in late trading with a move below 1.1300 on dollar short covering after earlier 8-month highs just above 1.1350. Overall, the US registered its worst week since May 2016 with a slide of more than 2%.
The Euro continues to find strength against the Dollar amid broad-based risk aversion in the financial markets. The currency pair has spiked over 1.14 this morning to hit its highest level since June 2019, having ended the last three straight weeks on a positive note.
The financial markets are a sea of red this Monday, with oil benchmarks reporting a 22 percent slide. The sell-off in oil has bolstered the risk-off tone already prevalent in markets due to coronavirus fears. The virus continues to spread outside China, notably in Italy and South Korea, at a faster rate. So the anti-risk environment is likely to persist, keeping the Euro better bid. The common currency bottomed out below 1.08 mid February and has rallied by over 500 pips ever since, establishing itself as a somewhat safe-haven currency.