Headlines
- Pound remains at 7-yr high vs. Euro – SNB decision weighs.
- Eurozone CPI confirmed at -0.2% – ECB action looks imminent.
- GBP/USD down half a cent – Despite US inflation falling to 0.8%.
- CAD up on mild crude oil rally – IEA says prices could recover later in the year.
Sterling
There were no key British ecostats released on Friday, which was fortunate really because most traders had their hands full already as they dealt with the fallout from the Swiss National Bank’s abrupt decision to remove the 1.20 EUR/CHF floor.
There are a few important pieces of domestic data to look out for this week; British unemployment is set to fall to a fresh six-year low of 5.9% and UK average earnings are tipped to rise from 1.4% to 1.7%. Whilst the data has the potential to drive demand for Sterling higher, it is likely to be overshadowed by Thursday’s monetary policy announcement from the European Central Bank, which many believe will see ECB Chief Mario Draghi roll out a full-scale sovereign bond-buying scheme.
Euro
The Pound to Euro exchange rate strengthened to a fresh seven-year high on Friday as the ramifications of Thursday’s SNB announcement continued to have a negative impact on the single currency. For over three years the Swiss National Bank had been the largest buyer of Euros in the market as it endeavoured to stop the Swiss Franc from appreciating against the single currency. So, naturally, when the SNB stopped swapping Francs for Euros, the Euro weakened across the board, including sinking to an 11-year low against the US Dollar and a seven-year low against the Pound.
With data on Friday confirming that the Eurozone fell into a state of disinflation in December, it is more likely than ever before that the ECB will opt to unveil an expansive quantitative easing scheme later this week. The timing of the SNB’s decision to drop its 1.20 floor also suggests that policymakers are on the cusp of something big. However, the ECB has made a habit over the past year or so of underwhelming market expectations with measures that are deemed either too weak or too imprecise. With this in mind there is potential for the single currency to appreciate on Thursday if the QE programme is insufficiently funded or talked about in too vague terms. On the other hand, it is entirely likely that the Euro could weaken if investors are impressed with the rumoured stimulus measures.
US Dollar
Although US inflation tumbled to a five-year low of 0.8% on Friday thanks to the largest monthly drop in consumer prices for six years, the ‘Greenback’ still managed to strengthen against Sterling. This is because analysts had been anticipating a slightly lower annual CPI score of 0.7%. A bumper University of Michigan consumer confidence reading of 98.1, the highest score since January 2004, also boosted the US Dollar. With all things considered, the Federal Reserve looks set to start raising interest rates in the second quarter of this year, which should lend the US Dollar a positive bias over the Pound because the Bank of England is currently expected to remain on the sidelines until the beginning of next year.
The commodity-correlated Canadian Dollar stole around a third of a cent from the Pound on Friday thanks to a slight uptick in demand for crude oil. A report from the International Energy Authority (IEA) indicated that crude oil prices could begin to normalise later on in the year if oil production slows as a result of the recent plunge in prices. The IEA suggested that there were already signs of this happening in some areas. On Wednesday the Bank of Canada is set to announce its latest benchmark interest rate, but market volatility is liable to remain limited because the BoC is tipped to maintain its current rate of 1.00%.
The comparatively high-yielding Australian Dollar rallied by around half a cent against the Pound on Friday as traders continued to come to terms with Thursday’s SNB announcement. With a -0.75% benchmark interest rate, Switzerland is a lot less attractive to investors than the +2.50% interest rate offered on deposits denominated in the ‘Aussie’ Dollar.
However, the Antipodean currency could run into some trouble at two o’clock tomorrow morning when China is set to release its latest GDP figures. Analysts predict that economic growth slowed from 7.3% to 7.2% in the fourth quarter, which could weigh on cross-border trade between Australia and China. Subsequently, the ‘Aussie’ is liable to depreciate if GDP comes in softer-than-anticipated.
Sterling moderated against the New Zealand Dollar on Friday following the steep three-cent declines suffered during Thursday’s landmark session. The far-reaching move from the SNB has been described by some as: ‘the single biggest un-telegraphed foreign exchange event in history’.