Headlines
- Pound rises on optimism – GBP/EUR close to 7-yr high.
Greek conflict with creditors continues – Germany unwilling to compromise on debt deal.
GBP/USD up slightly – US inventories disappoint.
Canadian Dollar down on BOC comments – Further rate cuts possible.
Sterling
Sterling rallied against most of the majors yesterday thanks to a better-than-anticipated set of British factory output numbers. Although UK industrial production was reported to have slid -0.2% in December due to extensive maintenance work on a number of North Sea oil rigs, amendments to previous reports showed that the sector actually grew 0.1% in the fourth quarter, confounding previous estimates that suggested a contraction of -0.1%. The report also detailed that manufacturing output rose by 0.1% in December and an upwardly revised 0.8% in November.
The Pound garnered further support from an estimate from the National Institute of Economic and Social Research (NIESR) signalling that Britain could have eked out economic growth of 0.7% in the three months to January, up from the 0.5% growth registered in the fourth quarter of 2015.
The upbeat datastream yesterday caused some investors to question just how dovish the Bank of England’s quarterly inflation report will be. The key question is whether BoE Governor Mark Carney will look to focus on the positive aspects of temporarily low inflation (more money in the pockets of Britain’s consumers) or focus on the possibility that low consumer prices could lead to a protracted period of weak growth and tepid wage rises.
The clash between Greece and its creditors continued yesterday as Greek PM Alexis Tsipras laid out a compromise plan to stick to 70% of the current bailout programme, which was instantly shot down by German finance minister Wolfgang Schauble.
Tsipras wants to swap 30% of the current deal for 10 new reforms, cut Greece’s primary surplus target from 3% to 1.49% and reshuffle some of the Hellenic nation’s debt pile so that it would be pegged to the level of growth in the Greek economy. Everybody in Europe is in agreement that the current debt plan is unsustainable but Herr. Schauble is adamant that Greece will not be able to deviate from the programme that the previous Greek government agreed to.
The Pound to Euro exchange rate peaked less than 10 pips away from a fresh seven-year high yesterday and Sterling could continue pushing ahead tomorrow if EU leaders reject Tsipras’ ambitious but democratically mandated new proposals.
The Pound ticked higher by around a third of a cent against the US Dollar yesterday as markets reacted to data in America showing that wholesale inventories grew by less-than-expected in December. Traders had anticipated a rise of 0.2% but the actual result saw a tepid increase of just 0.1%, which raised the possibility that fourth quarter US GDP could be revised lower in the future.
There is a little bit of support growing for the Pound because some investors feel that BoE Governor Mark Carney could use the bank’s quarterly inflation report on Thursday as an opportunity to emphasise that the crude oil related dip in consumer prices is likely to pass in time, thus keeping the door open to a 2015 rate hike. However, if the Canadian central banker opts for a more dovish approach, there is potential for sharp GBP/USD declines.
Canadian Dollar
Sterling came close to a new five-and-a-half-year high against the Canadian Dollar yesterday, rallying by just over two cents in response to remarks from Bank of Canada senior deputy Governor Carolyn Wilkins. The BoC official said that rates were slashed in January to help alleviate the fallout from the recent plunge in crude oil prices and hinted that further rate cuts could be introduced if policymakers felt it necessary. And these dovish remarks weighed heavily on the ‘Loonie’.
The Pound to Australian Dollar exchange rate strengthened by around a cent yesterday as some traders started to bet that the Bank of England will leave the door open to a rise in rates in Thursday’s highly anticipated quarterly inflation report. Australian data impressed, with investment lending rebounding from a -2.2% contraction in November to a +6.0% expansion in December, but it was not enough to lift the risk-sensitive ‘Aussie’ against the Pound.
The Pound rose by around a cent against the New Zealand Dollar yesterday morning but demand for the high-beta ‘Kiwi’ recovered during the evening, leaving GBP/NZD relatively flat on the day.
Data Released Today
Eurozone Finance Ministers Hold Meeting on Greece