Dollar jumps to month high vs sterling after BoE fails to signal monetary tightening

The New Zealand dollar jumped to a one-month high against the British pound after the Bank of England dashed the hopes of some investors who had expected it to signal a tightening in monetary policy.

The kiwi touched 51.72 British pence early this morning, and was trading at 51.62 pence at 8am in Wellington, from 51.38 pence at 5pm yesterday. The local currency was little changed at 86.62 US cents from 86.60 cents yesterday.

The British pound was the weakest major currency overnight after BoE governor Mark Carney in the bank's quarterly inflation report said Britain's recovery was still in its early stages and there is enough slack in the economy to keep interest rates on hold for a while yet. That deflated the expectations of some investors who had bet the bank would raise rates in less than a year's time.

"The Bank of England failed to boost expectations for monetary tightening," Kathy Lien, managing director of foreign exchange strategy for BK Asset Management in New York, said in a note. "Going into the release of the quarterly inflation report, most investors were positioned for a more optimistic and hawkish outlook from the central bank. They were hoping that the BoE would signal plans to raise interest rates this year but the central bank refused to deliver."

Investors are unwinding their "long" positions in the pound, where they had bet higher interest rates would strengthen the currency, Lien said.

The local highlight in New Zealand today is the annual government budget, delivered to parliament at 2pm by Finance Minister Bill English.

The budget is expected to highlight the strong local economy, and reiterate forecasts for a return to surplus next year, ANZ Bank New Zealand said in a note.

ANZ expects the kiwi to trade between 86.40 US cents and 87.20 cents today.

Traders will also be eyeing the BNZ-BusinessNZ PMI report for April, scheduled for release at 10:30am.

The New Zealand dollar advanced to 92.32 Australian cents from 92.14 cents yesterday. Reserve Bank of Australia head of financial stability Luci Ellis speaks to a housing conference at 11am New Zealand time today.

The kiwi was little changed at 63.13 euro cents from 63.14 cents yesterday ahead of the final reading of April European inflation tonight. The European Central Bank is preparing a package of policy options for its June 5 meeting including cuts in all its interest rates and targeted measures aimed at boosting lending to small and mid-sized firms, Reuters reported.

The local currency dropped to 88.20 yen from 88.45 yen yesterday while the trade-weighted index edged up to 80.52 from 80.47 yesterday.

Tonight, investors will be eyeing a speech by Federal Reserve chair Janet Yellen in Washington. In her testimony to Congress last week, Yellen pointed to an improving US economic outlook yet warned about risks such as the American housing sector.

(BusinessDesk)

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