Forex Today: Post-election USD weakness persists, focus shifts to BoE rate call
Here is what you need to know on Thursday, November 5:
The selling pressure surrounding the US Dollar (USD) following the midterm election result persists on Thursday, with the USD Index extending its slide toward 101.00 in the early European session. Later in the day, the Bank of England (BoE) will announce its monetary policy decisions and Bank of England (BoE) Governor Andrew Bailey will speak on the policy outlook and respond to questions in a press conference starting at 12:30 GMT.
The USD weakened against its major rivals midweek as markets reacted to Democrats winning the majority in both the Senate and the House. Crude Oil prices declined sharply on renewed optimism about a de-escalation of the conflict in the Middle East, and Wall Street's main indexes staged a risk rally following the opening bell. Meanwhile, the data published by Automatic Data Processing (ADP) showed that employment in private sector increased by 86K in October, surpassing the market expectation of 69K. Additionally, the Institute for Supply Management's (ISM) Services Purchasing Managers' Index (PMI) arrived at 54.5, pointing to an expansion at a healthy pace in the service sector's economic activity.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.78% | -0.66% | 0.40% | -0.12% | 0.24% | -0.18% | -1.01% | |
| EUR | 0.78% | 0.09% | 1.12% | 0.63% | 0.94% | 0.60% | -0.26% | |
| GBP | 0.66% | -0.09% | 0.87% | 0.54% | 0.85% | 0.49% | -0.35% | |
| JPY | -0.40% | -1.12% | -0.87% | -0.49% | -0.16% | -0.64% | -1.49% | |
| CAD | 0.12% | -0.63% | -0.54% | 0.49% | 0.35% | -0.14% | -0.88% | |
| AUD | -0.24% | -0.94% | -0.85% | 0.16% | -0.35% | -0.36% | -1.18% | |
| NZD | 0.18% | -0.60% | -0.49% | 0.64% | 0.14% | 0.36% | -0.90% | |
| CHF | 1.01% | 0.26% | 0.35% | 1.49% | 0.88% | 1.18% | 0.90% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Analysts at Scotiabank suggest that the latest bout of G10 Dollar weakness is best understood as “something of a ‘relief rally’” following recent political and market developments. They argue that the move also marks “a shift in the USD toward the middle of its ‘smile’, in which relative growth and interest rate differentials narrow as the US/USD drift from the edge linked to exceptionalism – with the other edge of the smile tied to sentiment-driven risk aversion.” In their view, this transition away from the extremes of the so‑called Dollar smile helps explain why higher‑beta currencies have been able to outperform as immediate tail risks recede.
GBP/USD gained nearly 0.4% on Wednesday and touched its highest level since mid-September slightly above 1.3500. The pair stays in a consolidation phase at around 1.3480 in the European morning on Thursday. Investors expect the BoE to raise the policy rate by 25 basis points (bps) to 4%.
Societe Generale’s Kit Juckes cautions that Sterling’s recent resilience could prove fragile if the BoE’s communication turns less forceful. He argues that “if the Bank of England’s guidance on Thursday shows any hesitation about how much further they need to go, the Pound could start looking vulnerable,” even though, in his view, “it is probably too early for them to give the appearance of slowing down.”
Gold (XAU/USD) responded positively to the US midterm elections outcome on Wednesday and gained more than 3%. XAU/USD carries its bullish momentum over to Thursday and trades above $4,100, rising about 1.5% in the European morning.
EUR/USD benefits from broad USD weakness and trades in positive territory at around 1.1250 on Thursday. The European economic calendar will feature Producer Price Index data for September later in the day. Additionally, European Central Bank President Christine Lagarde will participate in a discussion at the event titled "New Dialogues for the Future" in Milan, Italy.
USD/JPY registered marginal losses on Wednesday and continues to edge lower toward 158.00 in the European session. In the early trading hours of the Asian session on Friday, September Labor Cash Earnings data from Japan will be watched closely by investors.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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