Headlines
- BoE holds steady on rates – Pound upbeat on PMI data.
GBP/EUR remains strong– ECB strikes hard line with Greece.
GBP/USD rises a cent – US deficit increases 17%.
Sterling rallies 2.5 cents vs. CAD – Crude oil down -10%.
Sterling
The Bank of England stuck to its guns yesterday and maintained its ultra-low 0.50% interest rate for the 71st month in a row. Analysts can never be 100% about these things but the BoE’s interest rate announcements are currently one of the easiest outcomes to predict in the whole world of finance. Subsequently, the announcements seldom yield any market volatility.
However, Sterling traded with a fairly positive bias yesterday thanks to the trio of upbeat PMI results released earlier in the week. If domestic data continues to signal improvements in the British economy, and if disinflationary pressures begin to recede later in the year, then it could bring back the drama of the BoE interest rate decision; traders glued to their screens at midday on a Thursday anxiously awaiting the outcome, rather than clocking off at quarter-to for an early lunch and an appointment at the barbers.
Markets overlooked a robust 3.4% rise in German factory orders yesterday as most investors focussed on the latest developments in the Greek debt saga.
Greek finance minister Yanis Varoufakis met with German finance minister Wolfgang Schauble yesterday to discuss his desire to reshuffle the colossal Hellenic debt pile. Varoufakis claimed that Greece’s current reform programme – required in exchange for financial aid – is flawed in that it a) tries to fix Greece from the bottom-up rather than from the top down – i.e. fighting corruption and rent-seeking – and b) puts debt repayments ahead of fixing the Greek economy, impairing Greece’s ability to ever recover from the crisis.
But Schauble did not appear to be reading from the same page. The German finance minister said that Greece has to stick to the commitments made by the previous government and played down talk of a ‘bridging agreement’, which Varoufakis had sought to buy him time to arrange a long-term solution.
Overall, the talks were predictably inconclusive and markets are in no way closer to understanding what will happen next. This kept fears of an untimely ‘Grexit’ alive, which helped keep GBP/EUR close to seven-year highs.
The Pound to US Dollar exchange rate rallied by around a cent yesterday to strike a fresh monthly high in reaction to a disappointing US trade balance report.
Data showed that America’s trade deficit jumped 17% during December to reach a two-year low of -$46.6 billion. The dismal deficit print helped Sterling reach a 20-day high for the first time in 144 days and could mark the beginning of a turnaround in GBP/USD.
If this afternoon’s key US non-farm payroll report disappoints then we could see Sterling push ahead further. However, forecasts point towards a fairly sturdy NFP gain of 235,000, which should be enough to maintain support for the ‘Greenback’.
The Canadian Dollar rallied by around 0.8 cents against the Pound yesterday as volatility reigned over Canada’s most lucrative export, crude oil. Following a 9% fall on Wednesday, crude jumped 5% yesterday and this helped the commodity-correlated ‘Loonie’ to strengthen against the UK tender.
Later this afternoon data is expected to show that the Canadian unemployment rate remained static at 6.7% in January due to a minor 5,000 increase in job creation. An unexpected rise in unemployment could hurt the ‘Loonie’ but a surprise dip could lead to further gains for the Canadian currency.
Sterling traded close to five-year highs against the Australian Dollar throughout the day yesterday as investors speculated over the diverging outlooks of the two currencies’ respective central banks.
With UK unemployment at six-year lows and British PMI data showing signs of improvement, the Bank of England is forecast to start raising rates at some point in the next 18 months. But with commodity prices sinking and China – Australia’s largest trading partner – facing an economic slowdown, the Reserve Bank of Australia recently cut rates and further reductions are predicted. This dynamic is liable to push the Pound higher against the Australian Dollar in the near term.
The Pound to New Zealand Dollar exchange rate strengthened by around 0.7 cents yesterday afternoon, as British sentiment remained sturdy but risk sentiment was decidedly less so.
Data Released Today
GBP Visible Trade Balance (Pounds) (DEC)
CAD Net Change in Employment (JAN)
CAD Unemployment Rate (JAN)
USD Change in Non-farm Payrolls (JAN)
USD Unemployment Rate (JAN)