Headlines
- BoE remarks boost Pound – Q4 GDP print on tap.
- Pound close to 7-yr high vs. Euro – Markets surprisingly calm.
- GBP/CAD hits 5.5-yr high – BOC, oil and TD Bank forecasts weigh on ‘Loonie’.
- ‘Aussie’ & ‘Kiwi’ Weaken – Central Bank easing concerns weigh.
Sterling
Demand for Sterling ticked a little higher yesterday in response to comments from Bank of England policymaker Kristin Forbes. Forbes suggested that interest rates could rise sooner-than-expected if inflation rebounds over the next few months. Markets currently anticipate a rate hike from the BoE midway through 2016, but Ms. Forbes’ hawkish comments suggest that the UK central bank would be willing to start tightening monetary policy sooner than that if inflation were to rise. However, with global oil prices floundering at five-and-a-half-year lows, there is every possibility that the BoE will opt to remain on the sidelines for the duration of 2015.
Later this morning data will show how well the British economy performed in the fourth quarter of last year. Analysts predict that UK GDP growth slowed from 0.7% to 0.6%, which could have a mildly negative impact on the Pound, but Sterling shouldn’t fare too badly unless the growth print comes in below 0.6%.
Euro
The market reaction to the left-wing anti-austerity party Syriza winning the Greek general election on Sunday was strangely muted yesterday. The single currency sunk to a new seven-year low in a knee-jerk reaction to Alexis Tsipras’ victory but GBP/EUR gave back most of its gains during the London session. It seems that some market participants feel the new Greek Prime Minister is ‘all mouth and no trouser’, with many political commentators speculating that Tsipras will not be able to achieve what he has promised to the Greek electorate. Namely: to restructure and write-off a large portion of the Hellenic nation’s national debt.
The fact that Tsipras chose to form a government with the populist right-wing Independent Greek party, who have only one thing in common with his own Syriza bloc – that they want to opt out of the troika’s bailout package – shows that the young leader intends to go head-to-head with the finance ministers in Brussels who have repeatedly stated that Greece will have to stick to its debt obligations.
If Greece is allowed to restructure it could spark contagion in other indebted member states and if it is not permitted then Tsipras’ hard line stance, backed up by Greek voters, means that the Hellenic nation will likely default on its debt and be kicked out of the Eurozone. The calmness in European markets, helped off course by European Central Bank President Mario Draghi’s decision to launch a massive quantitative easing scheme last Thursday, suggests that investors are not betting on a ‘Grexit’ at this moment in time.
However, as the pages unravel over the next few months, the single currency could come under more pressure if the main characters in this epic narrative lead the Hellenic nation towards tragedy.
Sterling rallied by around half a cent against the US Dollar yesterday thanks to Bank of England policymaker Kristin Forbes’ encouraging comments on UK interest rates. However, the Pound could run into some trouble today if UK GDP disappoints because American data is tipped to impress. US durable goods are forecast to rebound from -0.7% to +0.5%, new home sales are expected to rebound from -1.6% to +2.7% and consumer confidence looks se to increase from 92.6 to 95.0. If economists prove accurate in their forecasts –which they often don’t – then GBP/USD is liable to weaken during today’s session.
The Pound to Canadian Dollar exchange rate drifted higher by over 1.2 cents yesterday to reach a fresh five-and-a-half-year high. The under-fire ‘Loonie’ weakened when TD Bank lowered its 2015 growth forecasts for the North American nation from 2.3% to 2.0% in response to the recent plunge in global oil prices. Another factor weighing the Canadian Dollar down is last week’s shock decision from the Bank of Canada to slash its benchmark interest rate from 1.00% to 0.75%. Some traders are wary that BOC Governor Stephen Poloz could act again with another rate cut before the year is out.
Sterling remained close to monthly highs against the Australian Dollar yesterday, as negative risk sentiment and weak commodity prices prompted speculators to consider the possibility of a rate cut from the Reserve Bank of Australia. With the BOC and ECB both announcing significant easing measures over the past week, the idea of a similar initiative from the RBA is gaining credence and constraining demand for the ‘Aussie’.
The Pound rallied by just over a cent against the New Zealand Dollar yesterday to strike a fresh monthly high as investors fretted over the threat of a dovish statement from the Reserve Bank of New Zealand later in the week. The RBNZ is not actually expected to cut rates but the central bank is likely to tone down talk of raising rates in the future, and this could easily have a negative impact on the high-beta ‘Kiwi’.
Data Released Today
09:30 GBP Gross Domestic Product (QoQ) (4Q A) 0.6%
09:30 GBP Gross Domestic Product (YoY) (4Q A) 2.8%
13:30 USD Durable Goods Orders (DEC) 0.5%
15:00 USD New Home Sales (MoM) (DEC) 2.7%
15:00 USD Consumer Confidence (JAN) 95