FX round-up: GBP ahead on BoE buffer call and SNP's stance on indyref#2


FX round-up: GBP ahead on BoE buffer call and SNP's stance on indyref#2

Tue, 27 June 2017
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FX round-up: GBP ahead on BoE buffer call and SNP's stance on indyref#2

(ShareCast News) - Sterling enjoyed a minor rise on Tuesday on the back of Bank of England requiring lenders to beef up their cash buffer in case of bad debts.
In its Financial Stability Report out this morning, the BoE said banks would be made to set aside an extra £11.4bn in the next 18 months to protect themselves against bad loans.

IG market analyst Joshua Mahony added that with the risk of a Brexit slowdown looming, the potential of a sharp rise in credit defaults thanks to rising to unemployment meant there was a clear need for banks to raise their capital buffer.

"Interestingly enough, it is the BoE who sparked this rush to take on credit, with lower interest rates lowering the cost of borrowing, lowering the benefits of saving, and stimulating the economy while raising credit risk."

Traders liked the FSR news, and also that the Scottish Nationalist Party had formally abandoned their plan for a second independence referendum before the completion of Brexit.

Sterling was an obvious beneficiary. At 16:57 BST, sterling was up up 0.45% to $1.2780, but down 0.62% to €1.1309.

The British currency -- overall a shadow of its pre-Brexit self -- was also ahead on the aussie, loonie, kiwi, rand and yen.

"Currency traders clearly care about a robust banking system," said David Madden at CMC Markets UK.

"Even though the new rule may curtail banks' profitability, it will enhance their stability in the long-term.

"Sterling was given a shot in the arm this morning when the Confederation of British Industry (CBI) announced the realised sales report for June, it came in at 12, while the market was expecting 4, and May's figure was 2."

Meanwhile, the euro's Tuesday strength came after ECB chief Mario Draghi said the Eurozone was getting stronger, and that the loose monetary policy was a factor in the region's improving economic health.

Draghi, who was speaking in Portugal, pulled up short of calling for a tightening of the monetary policy as he felt the inflation rate did not warrant it.

"Draghi is accustomed to keeping the euro on the soft side, but his acknowledgement of the better economic indicators from the region pushed the single currency higher," said Madden.

Finally, the US dollar had a mixed time. The dollar-spot index was down 0.7% to $96.740. The greenback was down on the euro, aussie and loonie, but up on the kiwi, rand and yen.

"The IMF cut their outlook for the US economy today, which when considering the negative path of core PCE inflation, makes a September rate hike increasingly unlikely," said Mahony.