Forex Market Review (European Session) – Pound plunges on ‘dovish’ rate hike; dollar unmoved by tax plan, Powell nomination
The pound was the biggest loser of today’s foreign exchange action after the Bank of England hiked rates by a quarter point but promised to be ‘gradual’ regarding future rate increases. The US dollar failed to benefit from the unveiling of key details regarding the tax reform plan of President Trump and Congressional Republicans.
The pound lost more than a cent against the dollar as it dropped to 1.3087 after the Bank of England raised interest rates but was cautious in signaling further hikes. The Bank said that additional rate hikes would be warranted while acknowledging the Brexit-related uncertainty. Any such hikes would be ‘gradual and limited’ however. The 2 deputy Governors dissented from the majority decision to bring the key rate back to 0.50% from 0.25%; reversing last year’s cut that was aimed at cushioning the economy from the impact of Brexit. The euro also shot up versus sterling to challenge the 0.89 level. It was last at 0.8907. There were not many surprises in the Bank of England decision and statements, but the market was perhaps expecting a more hawkish stance and was thus disappointed.
In today’s key economic numbers, UK construction PMI rose sharply in October to 50.8, back into expansion territory from the previous month’s disappointing 48.1 print. German employment numbers more or less met expectations and confirmed a buoyant labor market in Europe’s largest economy, while weekly initial jobless claims in the US fell to a new low of 229 thousand. In further good news for the US economy, labor productivity in the third quarter surged by 3%, which could allow for faster wage increases for American workers.
Euro/dollar posted some gains during the session but failed to break out of its post-ECB meeting range of the past 6 trading days. The pair was last at 1.1668, with the US dollar getting most of the attention this week due to the various key risk events out of the US, in contrast to the relatively more quiet news flow about the single currency.
There was also some modest disappointment for dollar bulls as details from the proposed tax plan of President Trump and Congressional Republicans did not spark much dollar buying. The prospect of a dovish-on-balance new Fed Chair also did not help the greenback to rally and dollar bulls have only Friday’s employment report to look forward to for possible good news. The proposed tax plan would reduce the corporate tax rate to 20% and tax rates for individuals would drop too. It remains to be seen whether Republicans can muster enough unity among themselves to pass the proposed plan, which could result in both faster economic growth but also higher deficits. Judging by the action in foreign exchange markets, there are lingering doubts whether a passage of such tax cuts can be achieved soon, especially in the US Senate where the Republican majority is thin.