The pound slipped on Thursday (May 9) after the Bank of England (BOE) held its benchmark interest rates at 5.25 per cent, while hawkish opinions from Bank of Japan (BOJ) members helped slow the yen’s fall.
The dollar index rose as traders start to focus on US inflation data due next week and its implications for Federal Reserve policy.
Sterling fell 0.3 per cent to US$1.2462, moving away from a three-week high of US$1.2709 touched last week. The BOE held rates, but a second official in the Monetary Policy Committee backed a cut, and governor Andrew Bailey said he was “optimistic that things are moving in the right direction”.
BOE officials voted 7-2 to keep rates at a 16-year-high. Deputy Governor Dave Ramsden joined Swati Dhingra in voting for a cut to 5 per cent.
According to LSEG data, money markets had almost fully priced in that the central bank would keep rates unchanged. But investors have been watching for signs to firm their expectations on when cuts could come.
They now expects a first cut in August, with the odds of such a move coming in June down to a 44 per cent chance, compared with a 55 per cent chance seen earlier in the day.
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“Today’s decision to maintain the base rate at 5.25 per cent came as no surprise to the markets, yet the certainty of a summer rate cut remains in question,” said Colleen McHugh, chief investment officer of Wealthify.
Elsewhere, against the Japanese yen, the dollar has been slowly inching up after it fell 3.4 per cent last week, its biggest weekly percentage drop since early December 2022.
The yen was 0.23 per cent lower on the day at 155.93 per dollar, with the Japanese currency briefly finding some support in the BOJ’s summary of opinions released on Thursday, which showed board members were overwhelmingly hawkish at their April policy meeting, with many calling for steady interest rates hikes.
The “BOJ appears to be hinting at the next rate hike, which could come in June or July as final results of wage negotiations come out,” said Charu Chanana, head of currency strategy at Saxo.
In the US, last week’s Fed policy meeting and downside surprise in US job growth have markets increasing bets for two rate cuts this year. But a chasm remains between Japan’s ultra-low yields and those in the United States.
Japan’s top currency diplomat Masato Kanda on Thursday reiterated a warning that Tokyo is ready to take action in the currency market.
Market players suspect Tokyo spent some US$60 billion last week to stem the yen’s slide after it hit its weakest in 34-years against the dollar around 160 yen.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.17 per cent to 105.70, having touched a one-week high earlier.
Traders will be closely watching April US producer price index (PPI) and the consumer price index (CPI) out next week for signs that inflation has resumed its downward trend toward the Fed’s 2 per cent target rate.
China’s offshore yuan was about flat on the day at 7.2335, as data revealed China’s exports and imports returned to growth in April after contracting in the previous month.
That could mean a potential delay for rate cuts some believed China would need to make to meet its 2024 GDP goal. REUTERS
