Sterling surges to highest in a year on Bank of England rate hike warning

Sterling jumped after the Bank of England warned it could raise interest rates for the first time in a decade in the coming months while the dollar rose after above-forecast inflation data that could allow the Federal Reserve to hike for a third time this year.

Wall Street was set to open lower, index futures showed after the inflation data. Earlier, weak Chinese data had weighed on European and Asian shares and pulled an MSCI measure of world stock prices down from record highs hit on Wednesday.

Britain's blue-chip FTSE 100 share index fell sharply after the BoE warning, which followed a monetary policy meeting, and was last down 0.7 percent at a two-week low.

Policymakers kept rates unchanged at a record low 0.25 percent but warned a hike was likely to be needed in coming months if the economy keeps growing and inflationary pressures continue to build.

Britain's vote last year to leave the European Union has raised doubts about the long-term health of the economy and strong short-term inflationary pressures.

Sterling rose to as high as $1.3358, adding a cent and a half to touch its strongest in more than a year, and to 89.11 pence per euro after the decision.
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UK election 2017: Why the hung parliament spells trouble for its economy

Theresa May’s snap election wager has backfired. The supposed “Brexit election” was intended to signal the public’s support for the prime minister’s approach to the UK’s departure from the European Union. Instead, it has left her incredibly weak, without even a majority in government and her future as leader uncertain. And the economic data reflects this.

Markets hate uncertainty. One measure that tracks this is the UK’s index of Economic Policy Uncertainty, which shows diminishing confidence around the country’s economic resilience. It is calculated by tracking daily articles relating to economic and political unrest in more than 650 newspapers in the UK. The higher the number, the more turbulent the economic outlook. The index surged from 286 on May 18, 2017 to a staggering peak of 521 on June 8 2017, the day of the general election.

This is significant because higher levels of uncertainty are associated with greater stock price volatility and reduced investment and employment in key areas of the economy like healthcare and infrastructure.

The UK’s rising uncertainty levels stretch back to its EU referendum on June 23, 2016. Since then, GDP growth increased by only 0.84% while inflation rose by 1.09%. Uncertainty around the UK’s future relationship with the EU and the Brexit negotiations has caused sharp movements in currency markets as a result of investors hedging their bets and speculating on trades. The day after the referendum, the euro to sterling exchange rate fell by a massive 6.2% overnight, while economic policy uncertainty hit a record value of 2,661. It fell a further 5.1% from June 2016 to May 2017 and 3.42% during the month of May 2017, alone.

The next graph shows the daily linkages between the euro to sterling exchange rate changes and economic policy uncertainty since May triggered Article 50 on March 29, 2017. A negative value implies that as the uncertainty index increases, the sterling to euro exchange rate tends to fall.
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Asian markets trade mixed after a negative lead from Wall Street

Asian stocks were mostly lower on Thursday following a subdued lead from Wall Street, while the dollar pulled up from near two-week lows and sterling languished under the weight of political fears one week before Britain's election.

MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 percent and looked set for its fifth straight session of losses as investors took profits after stocks hit a two-year high last week and as economic and geopolitical concerns continued to weigh on sentiment.

Japan's Nikkei advanced 0.8 percent after data showing recurring first-quarter corporate profits were the highest on record for the January to March period.

An increase in capital expenditure in the first quarter also adds to a raft of recent data pointing to economic expansion.

Manufacturing growth in Japan also rose to a three-month high, according to a business survey.

Australian stocks retreated 0.2 percent.

South Korea's KOSPI fell 0.3 percent and the Korean won weakened 0.2 percent to trade at 1,121 won to the dollar after data showed factory activity in May shrank for the 10th straight month.

Overnight, Wall Street closed slightly lower as financials lost ground after JPMorgan and Bank of America warned of revenue weakness in the current quarter, but gains in defensive plays offset the decline.

All three major US indexes ended May in positive territory.

The dollar gained after touching a near two-week low against the yen overnight.

It was up 0.2 percent from its previous close at 110.95 early on Thursday, its first positive session in five, but concerns about US politics capped gains.
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