The Pound edged lower against all of the majors yesterday evening when it was announced that George Osborne plans to give the Bank of England new powers to cap risky mortgage lending.
The new directive will allow the BoE to set a limit on how much money potential house buyers will be able to borrow in relation to their salary. The maximum multiple of income cap is designed to ensure the UK housing market does not become unstable and should help to prevent another housing bubble.
Sterling declined across the board in response to the news because markets interpreted it as a measure which would reduce the probability that the Bank of England will look to raise interest rates ahead of schedule.
Rapidly rising house prices were seen as one of the primary reasons for the bank’s shift in rhetoric from dovish to hawkish over the past 12 months. Therefore, if the new mortgage lending measures are effective in cooling the housing market then there will be less need for the BoE to hike interest rates in the immediate future.
Sterling sunk by -0.2 cents versus the Euro, -0.4 cents versus the US Dollar, -0.3 cents versus the Canadian Dollar, -0.3 cents versus the Australian Dollar and -0.4 cents versus New Zealand Dollar.
Earlier on in the day it was announced that the Royal Institute of Chartered Surveyors’ (RICs) house price index ticked higher from +55 to +57 last month. The strong figure caught markets off-guard, as the median consensus had suggested that the index would decelerate to +52. Sterling appreciated slightly in the aftermath of the reading but the majority of those gains were erased following the BoE lending cap announcement.
In other economic news, the Australian unemployment rate held firm at 5.8% yesterday despite the domestic labour market losing -4,800 workers. The Australian Dollar remained resilient following the labour market announcement as yield-hungry investors continued to buy into the Antipodean currency.
Eurozone industrial production printed positively at 0.8%, beating expectations of 0.5% but the robust report did not stop the Euro falling to fresh 18-month low against Sterling as ECB stimulus continued to weigh on demand for the single currency.
The appeal of the US Dollar softened slightly following the news that retail sales volumes increased by just 0.3% last month, half the 0.6% that was forecast beforehand. However, the ‘Greenback’ did not suffer any great losses because April’s score was positively revised from 0.1% to 0.5%.
The Pound to New Zealand Dollar exchange rate (GBP/NZD) sunk to a fresh 3-week low as traders continued to buy into the ‘Kiwi’ following the Reserve Bank of New Zealand’s decision to raise the benchmark interest rate from 25 basis points to 3.25%.
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