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Sterling drops due to rate cut and QE Programme

• Posted by Shyam Gokani in Uncategorised
• August 5, 2016
• No Comments

Sterling steadied this morning, recovering just over 0.2 percent against both the dollar and euro after the Bank of England drove its biggest daily losses in a month with a package of new stimulus for Britain’s slowing economy.

The Bank’s cuts in its growth forecasts for next year and its hints of more easing to come underline the central case bank analysts have made for the pound to weaken since June’s vote to leave the European Union.

The BoE’s interest rate cut, the first since 2009, was widely expected. However, economists had been divided on whether the central bank would revive its bond purchases and do more.

In the event, it launched a series of steps, including new bond-buying, purchases of corporate debt and a targeted lending programme.

The extent of the steps, and Governor Mark Carney’s ruling out of negative interest rates, also suggests any further cuts on the return investors get for holding sterling will be limited. One advantage the pound continues to have over some of its major peers are higher gilt rates.

The dollar trod water today as traders await a closely watched monthly U.S. labour market report that should provide clues as to whether the world’s biggest economy will bounce back after a lacklustre second quarter.

The U.S non-farm payrolls report (NFP) is due at 12.30 GMT, with economists polled by Reuters expecting 180,000 jobs to have been added in July.

A strong NFP reading could help the dollar by reviving expectations that the Fed could raise interest rates by year-end – a scenario that had been discarded in the days that followed Britain’s shock vote to leave the European Union in June.