Sterling Inches Higher After Worst Day Since the Aftermath of the Brexit Vote

On Friday, the Sterling rebounded modestly after its biggest one-day decline since the week after the Brexit vote in June 2016, with robust services data hardly cushioning the blow from the pushing-back of rate hike expectations of the Bank of England on Thursday.

Despite the Bank increasing rates for the first time in more than a decade, it also informed markets to anticipate only two more hikes in the next three years.

That sent the pound slipping by nearly 1.7% on a trade-weighted basis – its poorest display since June 27, 2016, in the aftermath of shock vote of Britain to leave the EU – as markets pushed back their bets regarding when the Bank of England would next increase rates to November 2018.

On Friday, data displaying the dominant services sector of Britain growing at its fastest rate in six months provided the pound with a modest lift, with the currency trades up 0.2% at $1.3090.

However, that still left it down well over 1%  against the dollar since the policy decision of the Bank of England.

“The fairly muted reaction (to the data) suggests that investors may be redirecting energy and attention elsewhere. Thursday’s dovish rate hike has not only encouraged sellers to pummel sterling but has also heavily bruised buying sentiment towards the currency,” stated an analyst at FXTM, Lukman Otunuga.

“With the bias towards the pound currently tilted to the downside, any appreciation could be viewed as … an opportunity for bears to begin fresh rounds of selling.”

The pound was offered a brief additional boost by U.S. labour market data showing that a slightly lower-than-expected amount of jobs were added last month. The brief weakness of the dollar allowed the pound to trade as high as $1.3134. However, it quickly retreated as the U.S. currency recovered.

On Friday, the sterling was also trading 0.4% up against the euro, after experiencing its worst one-day decline on Thursday against the single currency since a “flash crash” on October 7, 2016, when a sudden fall briefly slashed a tenth off the value of the pound.

“Were it not for well-above-target inflation, it appears highly unlikely that yesterday’s historic hike would have occurred, and the pound remains susceptible to further declines going forward,” said the chief market analyst at X-Trade Brokers, David Cheetham.

On Friday, Ben Broadbent, the BoE Deputy Governor, said that the signal of the Bank that it may need to increase interest rates two more times was “not a promise,” replying to a question regarding the previous attempts of the BoE to signal the possible path for interest rates.