Headlines
- Pound up ahead of labour market report – Unemployment tipped to hit 6-yr low.
- Rising real wages could support Sterling – Increase potential of future BoE rate hike.
- GBP/EUR rallies by a cent – Close to 7-yr highs.
- ‘Cable’ could have bottomed out – Still potential for weaker Pound/US Dollar exchange rate.
Sterling
The Pound recovered ground against most of its major currency peers yesterday as investors prepared for this morning’s UK labour market data, which is tipped to show that British unemployment fell from 6.0% to a new six-year low of 5.9% in December. Perhaps even more encouragingly, the report is anticipated to show that average weekly earnings increased by 1.7% in November, up from 1.4% previously. Because inflation was running at 1.0% at the time, this would mean that real wages grew by 0.7% in November.
Policymakers at the Bank of England have stated on many occasions that interest rates will start to rise when real wages have increased for a sustained period of time. Although the recent onset of rising pay packages owes a lot to the collapse in global oil prices rather than any significant improvement in the domestic economy, the symbolism of a 0.7% rise in real wages could have a positive impact on the Pound. It should help put the idea of an eventual rate hike back on the table at least.
The Pound to Euro exchange rate is trading close to its highest level since the first quarter of 2008. There are three factors weighing heavily on the single currency: 1) the imminent threat of quantitative easing from the European Central Bank, 2) the Swiss National Bank’s decision to stop buying large quantities of Euros on a daily basis and 3) the potential risk of a Greek exit from the Eurozone.
Despite these three potentially destabilising dynamics, consumers in Germany are feeling just dandy. That is according to a report from the Centre for European Economic Research (ZEW), which showed that economic sentiment rose from 34.9 to an 11-month high of 48.4 in January.
Traders, however, were less impressed with the state of the Eurozone economy and opted to drive GBP/EUR higher by over a cent yesterday.
US Dollar
The prospect of British pay packets rising faster-than-inflation energised Sterling yesterday, allowing the Pound to claw back the losses that it suffered on the insufferably named ‘Black Monday’. With little motivation, GBP/USD plunged 100 pips in quiet trade on Monday but the world’s oldest currency managed to fight back yesterday. If this morning’s UK jobs report prints inline with the sanguine market expectations then demand for the UK tender could improve again.
Indeed, technical indicators suggest that ‘Cable’ could have bottomed out when it hit a 17-month low on January 8th. On the other side of the coin, the US economy’s sturdier 2015 growth outlook – 3.6% compared to 2.7% in the UK – and the Federal Reserve’s stronger inclination to start raising interest rates, mean that there is still a relatively strong likelihood that GBP/USD could decline further over the coming months. The upcoming UK general elections look to be the biggest dark cloud on the economic horizon.
It was reported yesterday that Canadian manufacturing sales contracted during November for the third month in a row. The latest decline, -1.4%, sent the commodity-correlated Canadian Dollar spiralling lower against most of the majors. With officials from key oil producing nation Iran suggesting that crude could fall as low as $25 per barrel later in the year, the Pound managed to appreciate by just under three cents against the ‘Loonie’ yesterday. It was the largest daily gain for Sterling against the Canadian Dollar for at least two years.
Later this afternoon the Bank of Canada is due to announce its latest plans for monetary policy, but with the nation’s most lucrative export (oil) floundering at five-and-a-half-year lows there is little hope of a rate hike from the BoC in the foreseeable future.
After initially putting in a good performance yesterday morning in reaction to a slightly better-than-anticipated Chinese GDP print of 7.3%, the Australian Dollar quickly ran into trouble in response to a report from the International Monetary Fund. The IMF announced that it had downgraded China’s 2015 growth projection from 7.1% to 6.8%, which swiftly erased the optimism from China’s mildly upbeat 2014 growth report.
The Pound to Australian Dollar exchange rate strengthened by around two cents in response to the damning Chinese GDP downgrade.
It was a similar story for the New Zealand Dollar yesterday. The ‘Kiwi’ garnered support when the 2014 Chinese GDP report was released, but tumbled when the IMF published its latest global growth forecasts. With investors showing little appetite for risk, the New Zealand Dollar declined by over three cents to reach a fortnightly low against Sterling.
Data Released Today
09:30 GBP Employment Change (3M/3M) (NOV) 74K
09:30 GBP ILO Unemployment Rate (3M) (NOV) 5.9%
09:30 GBP Jobless Claims Change (DEC) -25.0K
09:30 GBP Average Weekly Earnings (3M/YoY) (NOV) 1.7%
13:30 USD Housing Starts (MoM) (DEC) 1.2%
15:00 CAD Bank of Canada Rate Decision (JAN 21) 1.00%
15:00 CAD Bank of Canada Releases Monetary Policy Report
16:15 CAD BOC Governor Stephen Poloz Press Conference