The Pound took a leg down in yesterday's trading after the Bank of England's Monetary Policy Committee meeting saw a 6-2 vote in favour of maintaining rates at 0.25%. There had been speculation of a shock rate rise after a jump in inflation, however that speculation was conclusively dismissed.
Perhaps more importantly the BoE has downgraded its forecasts for economic growth and wages as the uncertainty generated by Brexit starts to bite the real economy. Speaking in his press conference Governor Mark Carney was quite clear about his concerns over the amount of uncertainty Brexit was creating:
“It is evident that uncertainties about the eventual relationship are weighing on the decisions of some businesses. We see it directly in the macro-economic numbers, investment has been weaker than we otherwise would have expected.”
His comments on wage growth, a vital input to consumer confidence and consumer spending, were particularly interesting:
"There’s an element of Brexit uncertainty that’s affecting the wage bargaining. Some firms, a material number of firms, are less willing to give bigger pay rises as it’s not as clear what their market access is going to be over the next few years.”
With the Bank being more Dovish than expected, it wasn't a surprise to see Sterling weak on the back of the MPC rates decision and subsequent press conference. The minutes however did indicate that if the economy evolves in line with the MPC's current forecasts that policy would be tightened by a 'somewhat greater extent' than is being currently priced in.
Essentially - a slightly more Dovish tone with guidance that the trajectory over the longer term was for rising rates. The BoE have a tough balancing act and there isn't a lot of room for policy error (think December 2015 US rate rise), so how and when they choose to rise rates will be severely scrutinised by the market.
What it did mean, however was that internationally exposed indices were buoyant, as a weaker pound translates foreign currency earnings into higher profits.
In the uncertain Brexit world we find ourselves in, we have maintained an overweight to foreign currency earners and limited our UK domestic exposure. There will be a time when this negative Sterling trend turns around and we are far from the lows however, as global investors, we are relieved that we have a big pond to fish in and a research team with a broad focus to make that possible.
Sterling has retreated from early gains after the Bank of England cut UK growth forecasts and warned households' disposable income will decline next year, while the Monetary Policy Committee (MPC) voted to hold rates at 0.25%.