Headlines
- BoE rate decision on tap – Interest rates set to remain at 0.5%.
- Eurozone slides into disinflation – CPI prints at 5-yr low of -0.2%.
- Fed minutes suggest no hike before April – GBP/USD recovers slightly.
- Fed speech supports commodity currencies – AUD & NZD rise on hopes of low rates for longer.
Sterling
After a vicious start to the year, investors paused their Sterling sell orders yesterday morning in the absence of any fresh domestic data. However, demand for the Pound dipped during the evening against the commodity currencies in reaction to a slightly less hawkish than anticipated announcement from the Federal Reserve.
At midday today the Bank of England is set to announce its plans for monetary policy. However, the central bank statement is expected to draw about as much attention from traders as the Queen’s Christmas Day speech attracts from the Inuit people of Alaska: not very much. This is because almost everybody involved in the financial services industry expects the BoE to hold the interest rate at the current record low of 0.50%.
The big news regarding the Euro is that price pressures in the currency bloc fell into negative territory during December. Plunging oil prices took the Eurozone CPI rate down to -0.2% last month for the first time since the middle of the financial crisis.
Because this is the first time that inflation has fallen below zero for around five years it is technically described as disinflation rather than deflation. Deflation is technically defined as a prolonged period of declining prices whereby consumers delay purchasing goods in the hope/knowledge that they will be cheaper in the future. Analysts are concerned that disinflation will turn into full-blown deflation fairly easily if nothing is done to address the problem, and for this reason the weak CPI print is liable to give European Central Bank President Mario Draghi all the ammunition he needs to fire the ‘big gun’ of quantitative easing at the ECB’s next policy meeting on January 22nd.
The Euro declined slightly against the Pound in reaction to the -0.2% inflation print. In other news: Eurozone unemployment came in as expected at 11.5% but the report had little impact on the single currency.
The US Dollar performed well initially against Sterling yesterday in reaction to news that weak oil prices helped bring the US trade deficit down to an 11-month low of $39 billion in November, smashing estimates of $42 billion. The collapse of oil prices, which continued yesterday with another fresh five-year low, brought US petroleum imports down to their lowest level for around 20 years and this helped America spend -2.2% less on overall imports. The latest ADP employment gauge also benefitted the ‘Greenback’, printing higher-than-anticipated at 241,000, compared to forecasts of 225,000.
However, the Pound recovered a little bit during the evening in response to the latest Federal Reserve minutes report, which indicated that most Fed officials do not intend to start raising interest rates before the end of April. Nevertheless, Sterling is still trading close to its lowest level since July 2013.
The Fed’s suggestion that borrowing costs will not rise until late April, or possibly even later, helped support the Canadian Dollar yesterday even though crude oil fell to yet another five-year low. For the first time since April 2009 the value of crude fell below $50 a barrel. The onslaught relented momentarily during the afternoon when a phony report surfaced suggesting that the King of Saudi Arabia had died. But when it emerged that King Abdullah was not in fact dead selling of the prized commodity resumed.
Sterling weakened by around a cent against the Australian Dollar yesterday to a fresh monthly low in reaction to the slightly dovish Federal Reserve minutes report, which showed that policymakers would be ‘patient’ in considering when to start raising interest rates. This was considered a positive signal for the ‘Aussie’ Dollar because cheap credit is seen as being conducive to perceived riskier assets classes. The Antipodean currency also benefitted from a stronger-than-anticipated building approvals figure of 7.5%, smashing expectations of a -3.0% fall.
The Pound to New Zealand Dollar exchange rate tumbled by around a cent-and-a-half to a fresh five-month low yesterday evening due to optimism that the Fed could keep rates low for longer.
Data Released Today
09:00 EUR Markit Eurozone Manufacturing PMI (JAN P) 51
09:00 EUR Markit Eurozone Services PMI (JAN P) 52
09:30 GBP Retail Sales Incl. Auto (YoY) (DEC) 3.0%
13:30 CAD Consumer Price Index (YoY) (DEC) 1.6%
14:45 USD Markit US Manufacturing PMI (JAN P) 54