Headlines
- BoE inflation report lifts Pound – Rate hike bets brought forward, slightly.
Carney sees no signs of deflation – Predicts strong growth and wage increases this year.
GBP/EUR hits new 7-yr high – German inflation weakens.
Sterling strikes monthly high vs. US Dollar – GBP rallies 150 pips.
Sterling
The Pound strengthened broadly yesterday morning in reaction to the Bank of England’s latest quarterly inflation report. The main gist of Governor Mark Carney’s statement was that lower oil prices would benefit the British economy, even if they meant that inflation would likely dip to 0.0% in the second quarter of this year. Mr Carney played down the threat of Britain falling into a deflationary spiral and claimed that reduced fuel prices would boost consumer spending and therefore help drive consumer prices higher in the medium term. He also said that wages look set to increase to a decade-high rate of 3.5% this year.
The Pound rose on the back of a new inflation projection chart, which suggested that price pressures would overshoot the bank’s 2.0% target in two years if rates stay where they are. Markets interpreted this to mean that the BoE intends to raise interest rates at the start of 2016, slightly earlier than the previous estimate of mid-2016.
The bank also updated its GDP forecasts to indicate that the UK economy would expand at a record rate of 2.9% in 2015 and 2016. Mr Carney did mention that interest rates could be reduced if a negative spiral of falling prices started to occur, but the Governor was quick to assert that policymakers did not expect this to happen.
Overall, the quarterly inflation report was seen to be an upbeat affair, however, it does seem a little strange for investors to put so much faith in such a small update to the bank’s inflation projections.
Remember, the Bank of England is seldom accurate with its long term forecasts and it is not uncommon for figures to fluctuate significantly between each BoE report.
Sterling rallied by around a cent against the Euro yesterday morning to touch a fresh seven-year high as investors reacted to the mostly optimistic rhetoric of Mark Carney’s latest inflation report. Talk of ultra-low inflation in the near term was ignored as traders focussed on Mr Carney’s assertion that enhanced household spending trends would help drive price pressures, and indeed wages, higher over the next two years.
News out of the currency bloc was unsupportive for the single currency; German consumer prices printed worse-than-expected at -0.4% and Eurozone industrial production came in negatively at -0.2%. The Greek debt standoff showed no signs of progress, with contrasting newspaper reports suggesting that Greek and other EU officials couldn’t even agree on whose decision it was to not release a statement following Wednesday night’s meeting. This deadlock ensured that ‘Grexit’ fears continued to weigh over the Euro.
US Dollar
Sterling rallied by over 150 pips to a new monthly high against the US Dollar yesterday as traders adjusted their BoE rate hike expectations to factor in the possibility of a rise in rates at the start of, rather than halfway though, next year.
Demand for the ‘Greenback’ was also negatively impacted by a surprisingly downbeat US retail sales report, which indicated that retail spending contracted by -0.8% in the 12 months leading up to December. Investors saw the weak retail figures as a potential sign that the Federal Reserve may look to leave interest rates where they are for a little bit longer than markets currently anticipate.
The Pound declined by a cent in the build-up to the BoE inflation report yesterday morning but demand for Sterling increased during Mr Carney’s speech when it became apparent that the UK central bank does not see the current period of soft inflation as a negative signal for the domestic economy. By the end of the BoE announcement GBP/CAD had recovered and the Pound posted a half-cent gain against the ‘Loonie’ on the day.
The Pound to Australian Dollar exchange rate ticked up to a new five-and-a-half-year high yesterday morning. The more-optimistic-than-not BoE rhetoric helped the Pound rack up an impressive 250-pip gain against the ‘Aussie’ at one point.
The Antipodean currency’s woes started when disappointing Australian labour market data was released during the Asian session. A surprise rise in the headline unemployment rate from 6.1% to 6.4% alerted investors to the possibility that the Reserve Bank of Australia could slash rates further and this led to a sharp decline in demand for the Australian Dollar.
The Pound surged by around 1.5 cents against the New Zealand Dollar during the London session yesterday thanks to the latest shift in BoE rate hike bets, which favoured a slightly earlier-than-anticipated tightening of monetary policy.
Data Released Today
EUR Euro-Zone Gross Domestic Product s.a. (QoQ) (4Q A)
EUR Euro-Zone Gross Domestic Product s.a. (YoY) (4Q A)
USD U. of Michigan Confidence (FEB P)