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Thu 18 Aug 2022 23:22GMT

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No Change to BoE rates - Sterling Rallies

Yesterday saw the Bank of England keep interest rates on hold at 0.5%.

Although no-change had been widely expected, markets had priced in a 20% chance of a rate rise. Sterling dipped slightly after the announcement after traders cut their positions.

Despite the shock contraction in the UK at the end of last year, expectations of a rate hike have remained strong. Analysts have said that the prospect of continued sluggish growth, lower government spending and rising unemployment could heighten the BoE’s dilemma over when to tighten policy.

Data on Thursday showed British factory output fell unexpectedly in December, but a weather-related surge in energy production offset the decline, and economists hinted that they expect to see a manufacturing bounce-back in January, as order that have been backed up from the previous month are completed.

Sterling gained in the afternoon session yesterday as the market digested the central bank’s decision. The euro was placed under pressure as worries about the single currencies debt crisis and the lack of a quick solution were starting to emerge and as speculation waned that the ECB will act on interest rates anytime soon.

Therefore the BoE are still expected to raise interest rates before the European Central Bank despite yesterday’s decision, and market watchers will await the minutes of the meeting in the next two weeks to indicate how the voting went with the nine policy committee members.

The mere fact that it would seem that the Bank of England are now poised to announce when not if the interest rates will be raise is seeing a boost in the fortunes of sterling, but they will continue to play cat and mouse with the stuttering economy before injecting this apparent lifeline.

The US Dollar saw a rally against a basket of rival currencies on Thursday after a fall in US jobless claims with more gains seen against the euro on concerns about Europe’s worsening debt crisis and the apparent lack of proactive tackling of the problems by the ECB.

Traders have said that a recent spike in US yields may prompt further gains in the days ahead. This in addition to the dollar benefitting from its ever aiding safe have status has pushed the greenback higher to near one month highs versus the Swiss Franc and Japanese Yen.

Indeed The dollar’s safe haven appeal was bolstered further by renewed concerns about the level of political instability in Egypt, with calls for Egyptian President Hosni Mubarak, to step down immediately greeted with defiant refusal.

With the troubles in Egypt now seemingly getting worse it will interesting to see what effect this has on world markets, with the US Dollar most likely to benefit.

The focus of Central Bank’s actions has very much grabbed the headlines this week, and Europe are no exception.

The euro slipped against the dollar on Thursday as nagging doubts over a lack of concrete policy measure to tackle the euro zone debt crisis hit sentiment and pushed peripheral debt yields up.

The euro was slow on the uptake yesterday and lost any momentum it may have enjoyed earlier this week as the ECB ability to take concrete measures to tackle the ever increasing debt crisis was bought into question.

This issue now seems to be more important than when the European Central Bank will tackle interest rates.

The euro was down 0.6% versus the dollar at $1.6352 having resent o $1.3745 in US trade on Wednesday. Traders said Middle-Eastern accounts were buying around the day’s low of $1.3616, while key support was the 100-day moving average at $1.3541.

Implied options volatilities in the euro-dollar which is a measure on the market’s view of how much the pair will move in the future, were trading with a heavy feel.

Reports this week that the ‘Policy Hawk’ Axel Weber would not succeed Jean Claude Trichet as President of the European Central Bank, added doubts that euro zone rates would rise in the near future.

Asian stocks fell more than a percent and were on course for their biggest weekly loss in nine months as investors shunned risk on concerns about the pace of policy tightening in the region and growing tensions in Egypt.

Inflationary worries had started a broad sell off in Asia since the start of 2011, and shows no signs of stopping. Expectations of more monetary tightening have encouraged investors to shift funds from emerging markets, common in Asia and key trading partners to Japan, to markets that are more developed with the US benefitting most.

Indeed, the US Dollar hit a one-month high against the yen overnight after US job market data supported the greenback coupled with the euro falling on concerns grew about the slow pace of progress in resolving the ever increasing debt crisis.