Headlines
Pound sturdy on BoE optimism
– Rate hike predicted at start of 2016.
GBP/EUR hits fresh 7-yr high
– German 5-yr debt sinks into negative territory.
GBP/USD strikes 8-week high
– US inflation to hit -0.1%.
CAD stronger following BOC remarks
– Less likelihood of further rate cuts.
Sterling
The Pound remained strong yesterday against most of the majors due to the increasingly accepted view that the Bank of England will start raising interest rates in around a year’s time. The ‘Old Lady’ of Threadneedle Street commented earlier on in the week that firms should bank on inflation rising over the next two years and continue to increase their employees’ wage packets accordingly, which boosted the appeal of British government debt because it was seen to suggest that rates will rise in the foreseeable future. But yesterday the bank took a step away from monetary policy and focussed on developments in the digital sphere. The BoE commented that the proliferation of digital currencies such as Bitcoin could shake up the finance industry in the same way that the internet revolutionised the way people access information. Understandably, the bank’s proleptic remarks on the future of the technosphere had less of an impact on Sterling that it’s earlier comments on the path of interest rates, inflation and wage growth.
Euro
The Pound to Euro exchange rate touched a new seven-year high yesterday as investors opted to place their funds in UK government bonds in anticipation of higher yields when the BoE begins its rate hiking cycle. In contrast to the hawkish stance of the Bank of England, the European Central Bank’s recent decision to start purchasing Eurozone bonds – quantitative easing – has significantly reduced the yields on perceived safe-haven Eurozone bonds. For the first time on record, German five-year debt yields moved into negative territory yesterday, meaning that investors are now paying around 0.08% for the privilege of lending money to the German government. Naturally, this negative profit scenario has reduced the appeal of the some assets denominated in Euros. At the other end of the spectrum, perceived riskier debt in countries such as Greece, Spain and Cyprus – although offering healthy profit yields – has become less attractive due to the situation in Greece, which has raised the probability of default and contagion in the south of the currency bloc.
This morning the German unemployment rate is expected to print at 6.5%; but the sturdy German labour market is unlikely to provide the single currency with a boost because there is very little/no opportunity for profit on German government debt.
US Dollar
Sterling appreciated by around half a cent against the US Dollar yesterday to reach a new eight-week high as markets continued to propel the Pound higher in the wake of the drastic 20 cent downtrend that ravaged Sterling support levels in the second half of 2014.
Later today American price pressure data is anticipated to show that inflation sunk to a more-than-five-year low of -0.1% in January. This report has the potential to weaken the ‘Greenback’ and send GBP/USD closer to the its highest level so far in 2015, which incidentally was struck on the first day of the year.
British data is likely to have a muted impact on the Pound because fourth quarter is tipped to be confirmed at 0.5%, in line with previous estimates.
Canadian Dollar
The Pound remained softer against the Canadian Dollar yesterday thanks to Bank of Canada Governor Stephen Poloz’ clarifying policy statement on Tuesday, which appeared to pave the way for a period of stable interest rates rather than further rate reductions, as had previously been anticipated. With the BOC happy to remain on the sidelines and monitor the impact that cheap oil could have on the commodity-sensitive Canadian economy, there is potential for the ‘Loonie’ to claw back some of its recent losses, which were largely caused by fears of further slashes to the BOC’s benchmark interest rate.
Canadian CPI is expected to slide from 1.5% to 0.8% later this afternoon but the downbeat report is likely to have a less of a significant impact than it may have done, by virtue of Tuesday’s encouraging policy statement from Governor Poloz.
Australian Dollar
The Australian Dollar performed well against the Pound yesterday due to data out of China showing that manufacturing output increased at a rate of 50.1 in January, marginally higher than the 50.0 mark that separates contraction from growth; but considerably higher than the 49.5 figure that had been predicted by analysts.
New Zealand Dollar
The New Zealand Dollar also benefitted from the better-than-expected Chinese manufacturing PMI numbers, which bolstered trade expectations between the two nations, but Sterling managed to push ahead and register a half-cent gain during the afternoon as BoE rate hike bets carried the world’s oldest currency higher.
Data Released Today
EUR German Unemployment Rate s.a. (FEB)
GBP Gross Domestic Product (QoQ) (4Q P)
GBP Gross Domestic Product (YoY) (4Q P)
CAD Consumer Price Index (YoY) (JAN)
USD Consumer Price Index (YoY) (JAN)
USD Durable Goods Orders (JAN)