Bank of England Holds Interest Rates, Warns of Possible Brexit Recession

The pound has fallen against the dollar since Boris Johnson took office

The pound has fallen against the dollar since Boris Johnson took

While the USA central bank still cut interest rates to 2.25%, as widely expected, the tone of the accompanying policymaker commentary proved less dovish than anticipated.

As Fed Chair Jerome Powell noted that yesterday's move was "not the beginning of a long series of rate cuts" investors were encouraged to pile back into the US Dollar, with confidence in the economic outlook improving.

The Fed's policy decision drew dissents from Boston Fed President Eric Rosengren and Kansas City Fed President Esther George who argued for leaving rates unchanged in the face of the current economic expansion, an unemployment rate that is near a 50-year-low, and robust household spending.

"This outcome limits the dollar's downside from here".

With Brexit negotiations dragging on, the chance of a no-deal exit rising, and as the pound plunged, reaching a two-year low this week, the central bank predicted zero GDP growth in the second quarter-before the United Kingdom even departs the EU.

The index that tracks the dollar against a basket of six major currencies rose as high as 98.93, a 26-month jump.

The dollar was higher against the Japanese yen, with falling 0.5% to 108.19.

The Federal Open Market Committee (FOMC), the Fed's rate-setting body, trimmed the target for the federal funds rate by 25 basis points to a range of 2 percent to 2.25 percent after concluding its two-day policy meeting, in line with market expectation. Markets are pricing three cuts by year-end, the CME's Fedwatch tool shows.

In a campaign video released last month, ahead of his victory over Jeremy Hunt in the Conservative leadership contest, Mr Johnson told a member of the public: "If I get in we'll come out, deal or no deal, on October the 31st".

Traders will be watching the Bank of England monetary policy announcement later on Thursday to see whether it will respond to the growing probability of a no-deal Brexit.

"By no means do we think the weakness for sterling is over, in the sense that the market needs to price in more risk of a no-deal Brexit", said Ray Attrill, head of FX strategy at National Australia Bank in Sydney. The bank voted unanimously to keep the rate at 0.75%, as expected, but downgraded its projections for growth for the next two years.

"If the dollar remains supreme in G10 currencies, then this is trouble for sterling".

The Pound Sterling to US Dollar (GBP/USD) exchange rate came under renewed pressure this morning as the United Kingdom manufacturing sector showed continued deterioration.

The pound lost more than four per cent of its value in July, its worst month since October 2016, after new Prime Minister Boris Johnson's vow to leave the European Union on October 31 whether or not a transition deal can be agreed with Brussels.

In the past three months, sterling has tumbled 7.1% due to growing speculation Britain will go through with a no-deal Brexit.

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