Sterling Edges Higher as Traders Cut Bets on Jumbo UK Hike

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Reuters: The pound Sterling edged higher on Friday but hovered near two-week lows after a string of central bank decisions this week reinforced expectations that the Bank of England will not deliver another jumbo rate hike next week.

British Pound Sterling Edges Higher

Sterling was last up 0.1% against the dollar at 41.2813 and up 0.2% against the euro at 85.58 pence. Against the yen, sterling fell earlier by as much as 1.1% to its lowest in over a month, after the Bank of Japan said it would make its yield curve control policy more flexible, which investors initially took as a sign the central bank might be edging towards a shift in its ultra-loose monetary policy. The sharp rally in the yen reversed, leaving sterling up 0.2% on the day at 178.77 yen.

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The BoE Meets on Aug 3

The BoE meets on Aug 3 and, right now, traders are leaning more towards a rate increase of 25 basis points, but still see a 25% chance of another half-point rise. “The pound is struggling to book gains amid diminishing expectations that the Bank of England will be able to continue hiking rates aggressively,” City Index strategist Fiona Cincotta said. Investors are still betting heavily on a stronger pound and hold their most valuable bullish bet on sterling since 2014. But interest-rate differentials, which have been one of the major upward drivers for sterling this year, have eroded this month, as the likelihood of a rise in the UK to beyond 6% from 5% right now, has diminished in line with data that has shown inflation is cooling and parts of the economy are slowing. As a result, the premium of two-year gilt yields , which respond the most to changes in rate expectations, over two-year Treasury yields has collapsed to almost zero this month, from a multi-year high of around 45 basis points.

The Fed This Week

The Fed this week left open the possibility of more rate increases and excluded easing financial conditions anytime soon, which in theory supports the dollar. European Central Bank President Christine Lagarde on Thursday signalled that she did not believe there was much more ground to cover in terms of rate hikes and that any decisions on policy would depend on incoming data. The pound is now heading for a weekly gain of 1.1% against the euro, its largest this year.

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U.S. Dollar

Reuters: The yen had its most volatile trading session in months on Friday after the Bank of Japan tweaked its yield curve control policy, leaving investors wondering if an eventual shift in its massive stimulus program is approaching. Whipsawing as traders digested the decision, the Japanese yen weakened 1.13% versus the greenback and was last at 141.05 per dollar in the New York afternoon session. The BOJ is offering to buy 10-year Japanese government bonds at 1.0% and is keeping its short-term interest rate at minus 0.1% and the 10-year government bond yield around 0%. “This is a first step in moving to a tightening in overall monetary policy settings,” said Karl Schamotta, chief market strategist, at Corpay in Toronto. “It does acknowledge that Japan is gradually escaping its inflation trap, and we are seeing signs that the Bank of Japan is going to pull back on its accommodative monetary policy settings in the months and years ahead.” Schamotta added that the prospect of an increase in yields in Japan is weighing on global yields by suggesting that Japanese investors might keep more money at home, as opposed to redeploying it into government bond markets overseas. Meanwhile, the dollar fell against a basket of its major peers as investors largely shrugged off new data showing inflation slowing as they continue to sort through multiple central bank decisions this week to understand the outlook for monetary policy. U.S. annual inflation in June increased by the smallest amount in more than two years, with underlying price pressures moderating. If the trend continues, it could push the Federal Reserve closer to ending its fastest interest rate hiking cycle since the 1980s.

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South African Rand

Reuters: The South African rand posted strong gains on Friday afternoon, on buoyant risk appetite whetted by the prospect that global interest rates could be nearing their peak. At 1510 GMT the rand was trading at 17.6250 against the dollar, about 1.2% stronger than its previous close after earlier trading up as much as 1.5%. “With major central banks expected to end their rate hikes and the global economy remaining resilient, the rand could be set for further gains ahead,” said Lloyd Miller, co-head of financial markets at ETM Analytics. “South African bonds are trading at attractive levels to foreigners and as inflows into the bond market improve, the rand will continue to strengthen.” The U.S. Federal Reserve raised rates as expected on Wednesday, but some investors expect that to be the last increase in its hiking cycle. The South African Reserve Bank kept rates on hold last week after 10 hikes in a row. Also supporting the rand on Friday was a weaker dollar on global markets and data showing South Africa recorded a budget surplus in June.

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Global Markets

Reuters: Asian shares were trying to end the month on a firm note on Monday in a week littered with major economic releases, central bank meetings and earnings updates from mega caps Amazon and Apple, though rising Japanese bond yields posed a risk. China surveys were mixed with factory activity just pipping forecasts but services disappointing, though both merely reinforced wagers that Beijing would have to act at some point. China’s State Council on Monday did issue measures to restore and expand consumption in the automobile, real estate and services sector, though this was a long way from the massive fiscal spending markets have been counting on.

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