FX Focus: Pound gains ground against euro but BoE refuses to rule out another rate cut

The pound edged higher on Friday (5 August), recouping some of the losses it booked in the previous session after the Bank of England announced it cut the benchmark interest rates to a historic low of 0.25%.

Having fallen over 1% against its 16 major peers in the wake of the BoE's announcement on Thursday, sterling climbed 0.24% against the euro to €1.1804 and edged 0.05% higher against the dollar to $1.3111.

Analysts, however, remained adamant the British currency should brace itself for a rough ride, particularly as BoE's deputy governor Ben Broadbent refused to rule out further rate cuts this year.

Broadbent indicated Threadneedle Street officials would not hesitate to lower the benchmark interest rates, should the new stimulus package not prove sufficient to spur the British economy into life.

"Intervening in the corporate bond market not only reduces domestic corporate funding costs, but also encourages foreign entities to use the pound as a funding currency by lowering the cost of borrowing in pounds," said analysts at Morgan Stanley.

"Finally, the BoE reengaging in quantitative easing flattens the gilt curve, reducing the pound's yield advantage against other low-yielding currencies, including the euro."

Elsewhere, the dollar rose to a week-high against the euro, hitting $1.1089, and climbed 0.50% against the yen to ¥101.73.

The gains came after data released earlier in the session showed the US economy added 255,000 in July, compared with the 180,000 that analysts had forecast.

The better-than-expected non-farm payrolls in July could renew speculation the Federal Reserve might hike interest rates as soon as this September, but analysts believe Fed officials will want to see stronger GDP growth before making that decision.

"The labour market figures would appear to support a near-term rate hike," said Paul Ashworth, chief US economist at Capital Economics.

"Unfortunately, the activity data is not as upbeat. As a result, we still expect the Fed to wait until December before hiking the fed funds rate again."