CURRENCIES: Pound Slides After BOE Stands Pat On Rates; Dollar Remains Under Pressure

By Sue Chang and Sara Sjolin, MarketWatch Features Dow Jones Newswires

BNP Paribas warns against potential dollar short squeeze

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The U.K. pound fell against the dollar and the euro on Thursday after the Bank of England kept interest rates at a record low, and struck a downbeat tone on wages and economic growth.

The decline was enough to keep the dollar in modestly positive territory, although its gains were limited by a decline against the Japanese yen as sentiment for the U.S. currency remained bearish.

Sterling slid 0.7% to $1.3147, after hitting $1.3267 earlier in the session in the wake of a better-than-expected reading on U.K. services activity (http://www.marketwatch.com/story/uk-services-sector-grows-modestly-2017-08-03) in July. The U.K. unit traded at $1.3225 late Wednesday, and swung in a range of $1.3112 and $1.3267 on Thursday.

Against the euro, the pound tanked 0.8% to EUR1.106 from EUR1.115 on Wednesday, marking the lowest trading level since November last year.

The pullback came as investors assessed the BOE's rate decision, monetary-policy statement and quarterly inflation report--the "Super Thursday" trio of simultaneous releases. The central bank voted 6-2 to keep the key interest rate at a record low of 0.25% (http://www.marketwatch.com/story/boe-says-rates-may-rise-faster-than-markets-expect-2017-08-03), arguing that economic growth "remains sluggish in the near term as the squeeze on households' real incomes continues to weigh on consumption."

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The central bank in its inflation report cut its 2017 gross domestic growth forecast to 1.7% from the 1.9% predicted in May. It also reduced its outlook for growth in 2018 to 1.6%, from 1.7%.

The policy makers said U.K. wages are expected to "remain subdued" for the rest of the year, while also cutting its salary growth for 2018 to 3% from 3.5% expected previously.

"The market took the decision as pretty dovish, probably because the 6-2 vote suggests the MPC is a little further away from hiking than it was last time when it voted 5-3," said Neil Wilson, senior market analyst at ETX Capital, in a note.

He noted, however, that one of the hawks from the June meeting--Kristin Forbes--has been replaced with Silvana Tenreyro, who has a dovish record.

"But the bank said markets may be underestimating how far it needs to raise its benchmark rate over the forecast period. The MPC reckons on two hikes over the next three years, with the first coming in Q3 2018. All else being equal this ought to be supportive of sterling. So a dovish vote but a slight tightening bias is being displayed," Wilson said.

In other currencies, the dollar rebounded slightly on Thursday. The ICE Dollar Index was mostly flat at 92.75 after trading around a 15-month low on Wednesday (http://www.marketwatch.com/story/dollar-languishes-at-15-month-low-with-adps-jobs-report-waiting-in-the-wings-2017-08-02). Traders are looking ahead to Friday's closely watched nonfarm-payrolls report.

"In the short term, speculation on the dollar is very bearish, and based on the futures market, we're seeing the most negative view on it expressed since 2009," said Rui De Figueiredo, chief investment officer and co-head of the Solutions/Multi-Asset Group at Morgan Stanley Investment Management.

See:Ignoring Washington chaos, companies likely kept up strong hiring in July (http://www.marketwatch.com/story/ignoring-washington-chaos-companies-likely-kept-up-strong-hiring-in-july-2017-07-30)

U.S. jobless claims fell by 5,000 in the latest week, coming in near a 44-year low (http://www.marketwatch.com/story/us-jobless-claims-fall-by-5000-to-240000-2017-08-03). Separately, a reading of service sector activity slowed in July to the weakest rate of growth in 11 months (http://www.marketwatch.com/story/ism-services-index-slows-to-11-month-low-in-july-2017-08-03).

Sam Lynton-Brown, foreign exchange strategist at BNP Paribas in London, noted that short positions--bets that the greenback will decline further--are at a five-year extreme and that could expose investors holding shorts as the dollar could reverse its weak trend.

"Expectations around US growth and inflation are so subdued, we see potential for a considerable U.S. dollar short squeeze if U.S. data surprises to the upside and/or renewed optimism around the likelihood of US fiscal stimulus," said Lynton-Brown in a note.

The euro rose slightly to $1.1881. Thus far this year, the euro has gained nearly 13% against the dollar.

The dollar fell 0.5% against the yen , buying Yen110.14, compared with Yen110.74 on Wednesday. The dollar is down about 5.8% in 2017.

"We think the dollar is trading about 10% above fair value against the euro, but against the yen it is a different story," De Figueiredo said. "We think the dollar is likely to appreciate against the yen over the rest of the year, due to rising inflation in Japan."

(END) Dow Jones Newswires

August 03, 2017 12:26 ET (16:26 GMT)