Headlines
UK inflation report on tap
– CPI tipped to fall to more-than 25-yr low.
GBP/EUR close to 7-yr high
– Eurogroup meeting closed early due to impasse.
‘Cable’ down half a cent
– On UK inflation concerns.
RBA not looking to cut again
– GBP/AUD down 70 pips.
Sterling
The Pound suffered losses against most of the major currencies yesterday as investors hedged their bets ahead of this morning’s UK inflation report, which is expected to show that consumer prices fell to their lowest level for at least 25 years last month. During December the British CPI rate fell to a joint-15-year low of 0.5% and the median market consensus indicates that price pressures sunk to 0.4% in January: a level not seen since before 1989. The colossal collapse in global oil prices, which has taken crude down by over 50% since mid-2014, means that fuel prices have receded significantly right across the globe over the past six months.
But, although this is liable to take British inflation down towards 0.0% over the next few months, the Bank of England Governor does not expect the UK to succumb to a period of growth-sapping deflation and therefore does not intend to loosen monetary policy in the foreseeable future. The clear message from last week’s BoE statement was that interest rates are likely to rise in around a year’s time and this fact alone should limit Sterling’s losses this morning, even though CPI is tipped to hit a significant multi-decade low.
Euro
The Pound appreciated against the Euro yesterday evening in response to the latest twist in the Greek debt saga, which saw the Hellenic nation fail to make any progress whatsoever with its creditors.
In the past, Eurogroup meetings between Eurozone finance ministers often dragged on into the early hours of the morning as officials attempted to hammer out deals to secure funding for their respective countries, and it was expected that last night’s discussions would go the whole nine yards. However, this new, young, ultra-left Greek government has made it abundantly clear that it does not want to follow in the footsteps of its predecessors and instead wants to change the dynamic between Greece and the rest of Europe. But with Greece unwilling to sign up for an extension to its current bailout scheme and the Eurogroup insisting that it does, officials quickly realised yesterday that an impasse had been reached and the meeting was broken up after just 30 minutes.
Although there is still time for a deal to be clinched, the prospect of a potentially destabilising Greek exit from the Eurozone is increasing with every failed debt renegotiation meeting.
US Dollar
Sterling lost out by around half a cent against the US Dollar yesterday as Britain’s soft inflationary outlook weighed on demand for ‘Cable’ in the short term. GBP/USD tumbled from a monthly high ahead of this morning’s UK CPI result, which is tipped to show that price pressures cooled to their lowest level in more than 25-years last month.
Trading conditions were fairly sparse yesterday due to the President’s Day holiday, which allowed US traders to stay at home with their families whilst European leaders played hardball with the fate of the global economy. Although US markets are due to reopen later on today, there is little in the form of key American ecostats to have an impact on GBP/USD.
Canadian Dollar
The Pound to Canadian Dollar exchange rate weakened by around 40 pips yesterday as traders reacted to the likelihood that British inflation tumbled to a multi-decade low at the start of the year. But even if today’s CPI data does show that UK price pressures decelerated in January, there is a fairly good chance that the commodity-sensitive Canadian Dollar could struggle to post any meaningful gains against the Pound due to the current climate of multi-year low crude oil prices.
Australian Dollar
Increased demand for the Australian Dollar took GBP/AUD lower by around 70 pips yesterday as markets reacted to the Reserve Bank of Australia’s latest minutes report, which showed that policymakers would prefer not to reduce rates further in the near future. The RBA said that it decided to cut rates earlier this month due to an unforeseen deterioration in economic circumstances, but indicated that it was not keen to cut rates again right away due to concerns surrounding the overheating housing market, and this bolstered the appeal of the ‘Aussie’ Dollar.
New Zealand Dollar
The Pound declined by over a cent against the New Zealand Dollar yesterday as sturdy New Zealand retail sales boosted the ‘Kiwi’ and the prospect of soft UK inflation detracted from the appeal of Sterling.
Markets will be listening in attentively to Reserve Bank of New Zealand Governor Graeme Wheeler’s speech in Auckland later this evening, which some commentators feel could include details of a macro-prudential scheme that could help regulators cool New Zealand’s housing market without raising interest rates further; an announcement of this kind could hurt the New Zealand Dollar.
Data Released Today
GBP Consumer Price Index (YoY) (JAN)
GBP Consumer Price Index (MoM) (JAN)
EUR German ZEW Survey (Economic Sentiment) (FEB)
NZD RBNZ Governor Wheeler Speaks in Auckland