The British pound licked its wounds on Friday, a day after the Bank of England not only cut interest rates but also restarted its bond purchase program to shore up the economy, while the dollar held firm ahead of the U.S. employment data.
The BoE cut rates to a record-low 0.25 percent from 0.5 percent as widely expected, pledged 60 billion pounds ($78.71 billion) in government bond purchases and launched schemes to buy high-grade corporate bonds and ensure banks pass on the full rate cut to borrowers.
The larger than expected measures pushed the British pound GBP=D4 down 1.6 percent on Thursday, its biggest fall in a month. It last stood at $1.3130, about 0.2 percent above late U.S. levels.
Still, having broken below its trend line support since its recovery from a three-decade low of $1.2798 hit on July 6, the currency is seen at risk of testing that low again, some analysts said.
Carney says, however, that monetary policy can’t entirely offset the impact from Brexit on the economy.
Gross domestic product is likely to be 2.5% lower at the end of the forecast period than what was predicted in May. Meanwhile, unemployment is seen as rising to 5.5% over the next two years from 4.9% now.
BoE governor Mark Carney y is being asked why the BOE isn’t forecasting a recession next year, as many economists are predicting. He confirms there’ll only be slow growth in 2017, but no recession as the package announced today should work as a buffer for the economy.
The stimulus measures have “improved the economic prospects of the country,” Carney says.
The Bank of England sees inflation rising much faster than expected now, as Brexit has pushed the pound sharply lower. Consumer price inflation is forecast to reach 2.4% in two years.
“The fall in sterling will push up on import and consumer prices notably over the next three years. Indeed, despite the much weaker outlook for activity, CPI inflation in two years’ time is projected to be higher than expected in May,” Carney says.
Pound falls further as Carney explains the BOE’s easing package. Sterling slides to $1.3139, compared with $1.3321 just before the BOE’s policy decision was announced.
Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 269,000 for the week ended July 30, the Labor Department said. Economists had forecast initial claims slipping to 265,000 in the latest week.
The number of Americans filing for unemployment benefits unexpectedly rose last week, while renewed job cuts in the energy sector boosted layoffs announced by U.S.-based employers in July.
Despite the increases, the labor market remains healthy and will probably continue to support economic growth for the rest of this year. While other data on Thursday showed orders for factory goods fell for a second straight month in June, largely on weak demand for transportation equipment, there were signs spending cuts in the energy sector were easing.
New orders for U.S. factory goods fell for a second straight month in June on weak demand for transportation equipment and capital goods, but signs of stabilization in business spending offered some hope for struggling industries.
The Commerce Department said on Thursday that new orders for manufactured goods declined 1.5 percent after a downwardly revised 1.2 percent decrease in May.
Brent crude LCOc1 settled up $1.19, or 2.8 percent, at $44.29 a barrel.
U.S. West Texas Intermediate (WTI) crude CLc1 rose $1.10, or 2.7 percent, to settle at $41.93 per barrel. In the previous session, it rose 3 percent, after settling below $40 on Tuesday, the first time since April.
Oil prices rose nearly 3 percent on Thursday, with U.S. crude advancing firmly above the $40-per-barrel mark on short-covering and after a modest stockpile drop at the delivery hub for U.S. crude futures.
It was a second straight day of gains for crude futures from April lows below $40, after Wednesday's 3 percent run-up powered by data showing a hefty U.S. gasoline inventory drawdown.
Reference: Reuters, Kitco, Market Watch
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