Headlines
Pound sturdy on BoE optimism
– Carney urges firms to keep hiking wages.
GBP/EUR hits fresh 7-yr high
– But Greek debt deal provides respite for single currency.
GBP/USD close to 6-week high
– Despite hawkish Fed comments.
Commodity currencies up vs. Pound
– CAD rallies 230 pips.
Sterling
Yesterday morning the Bank of England gave the Pound a little bit of a boost by urging companies not to use the current period of below-target inflation as an excuse to hold back on wage increases. Governor Carney warned that if wages, which are currently rising at their fastest rate for seven years, began to slow then it could curtail development in the British economy. He argued that despite the CPI rate currently standing at its lowest level on record, interest rates will need to be raised over the next two years to prevent inflation from overshooting the 2.0% target; and that firms should take that into account when ‘forming judgements about appropriate wages’.
Although the speech was interpreted as positive for BoE rate hike expectations, the Pound did not appreciate massively following the announcement because it only went a little bit further to explaining the rationale behind the bank’s latest interest rate projections. Some traders are also still sceptical as to whether inflation will actually rise as rapidly as BoE policymakers anticipate.
Euro
The Pound to Euro exchange rate rallied to another fresh seven-year high yesterday morning as Eurozone consumer prices printed at a joint-five-year low of -0.6%. However, the single currency recovered slightly later on in the day when it was announced that Greece’s creditors had accepted the Syriza government’s proposed economic reform programme, effectively securing Greece’s position within the Eurozone for at least the next four months.
Newly elected Prime Minister Alexis Tsipras and his finance minister Yannis Varoufakis underlined plans to clamp down hard on corruption and tax fraud to provide cash for stimulatory welfare programmes, whilst still maintaining a primary budget surplus in line with the ECB, the EU and the IMF’s objectives.
The clinching of the deal boosted the appeal of the Euro because it was seen as better than any other potential alternative – i.e. an immediate Greek exit from the Eurozone – but many investors are still harbouring fears over the efficacy of the proposed measures. There were also concerns voiced from within the left-wing Greek government from those who felt that the measures contravene promises made during the run-up to the election to end austerity and ‘fiscal slavery’.
US Dollar
The Pound to US Dollar exchange rate came within five pips of striking a new six-week high yesterday despite positive rhetoric from Federal Reserve Chairwoman Janet Yellen, which appeared to pave the way for higher interest rates later in the year.
Ms. Yellen cheered the improvements in the US labour market, predicted that inflation will rise towards the 2.0% goal and admitted that the Fed ‘will at some point begin considering an increase in the target range’ for the bank’s benchmark interest rate. Ms. Yellen has played her cards very carefully, so as to avoid a repeat of the ‘taper tantrum’ that saw huge volatility in financial markets towards the end of her predecessor Ben Bernanke’s reign as a result of confusing central bank statements. And her cautious approach seems to have paid off because she has managed to avoid causing too many large swings in global stocks and major currencies following her statements on monetary policy.
Canadian Dollar
Demand for the Canadian Dollar surged yesterday, lifting the ‘Loonie’ higher by around 230 pips against Sterling, in response to comments from the Bank of Canada suggesting that interest rates will remain static for the foreseeable future whilst the Canadian central bank monitors the impact of the recent downward shift in crude oil prices. The BOC cut rates by -25 basis points to 0.75% in January and Governor Stephen Poloz said that this was an ‘insurance’ policy to prevent the risks from lower oil export figures spilling over. Markets responded positively to the statement because it appeared to take away the immediate threat of another rate cut from the BOC.
Australian Dollar
The Australian Dollar rallied by around 270 pips yesterday, reversing the Pound’s strong gains on Monday. Apart from profit taking, the only real motivation behind the move was relief that Fed Chairwoman Janet Yellen didn’t bring forward expectations for a tightening of monetary policy in the US. The Fed President’s cautious approach kept hopes of cheap credit lasting into the second half of the year alive, and this benefitted the high-beta ‘Aussie’ Dollar.
New Zealand Dollar
The New Zealand Dollar also put in a wonderful performance against the Pound yesterday, growing in strength by 200 pips as investors looked to lock in profit following Monday’s sharp Sterling gains.
Data Released Today
GBP BOE’s Carney, Deputy Governors Speak at Research Conference
USD Fed Chair Yellen Testifies to Financial Services Committee
EUR ECB’s Draghi Takes Part in European Parliament Debate
NZD Trade Balance (New Zealand dollars) (JAN)