The pound vs dollar rate bounced off the 1.36 level on Thursday after the Bank of England (BoE) revealed that two members of its Monetary Policy Committee (MPC) voted for an early end to pandemic-era government bond-buying. The news brought forward bets on an interest rate rise to March, providing the pound with a platform to jump above 1.37 against the dollar as it recovered almost all its losses for the week.
As anticipated, the BoE held its main interest rate unchanged at 0.1% and stuck to its £895 billion asset purchase target. Investors were buoyed by news that MPC member Dave Ramsden joined Michael Saunders in voting for an early end to the BoE’s programme of government bond purchases, despite policymakers voting unanimously to leave interest rates unchanged. The 7-2 vote signals the start of a shift towards higher rates and increases the chances of quantitative easing ending earlier than expected.
The minutes from the BoE’s meeting offset official data that showed Britain’s economy lost more momentum in September as businesses contended with rising costs. The preliminary IHS Markit/CIPS flash Composite Purchasing Managers’ Index (PMI) fell for a fourth straight month to its lowest reading since February, edging down to 54.1 from 54.8 in August.
Dollar slips on central bank signals
The dollar had brushed off Wednesday’s announcement by the US Federal Reserve that it would start dialling back its pandemic-related stimulus “soon”. However, news that the BoE had signalled an early end to its own stimulus weighed it down – and the pressure increased following the release of several underwhelming economic indicators.
US states registered a surprise increase in initial jobless claims last week, which moved further above a pandemic-era low recorded earlier in September. Initial unemployment claims rose by 16,000 to a seasonally adjusted 351,000 from a revised 335,000 the previous week, the Labor Department said on Thursday.
Business activity in the US expanded at its slowest pace in a year during September, with ongoing supply constraints and surging demand raising expectations for a sharp slowdown in economic growth in Q3. The IHS Markit flash US Composite PMI Output Index – which tracks activity in the manufacturing and services sectors – dropped to 54.5 in September. This represents the lowest reading in 12 months and followed 55.4 in August. A reading above 50 indicates growth in the private sector.
The only notable economic release today is New Home Sales data for August from the US Census Bureau.