Headlines
Pound down vs. majors
– UK industrial output disappoints.
GBP/EUR hits fresh 7-yr high
– ECB QE weighs.
‘Cable’ sinks to 20-month low
– Breaks below 1.50.
GBP/NZD down 3 cents
– RBNZ signals stable rate outlook.
Sterling
Following a strong start to the week, Sterling plunged against most of the majors yesterday in reaction to a disappointing set of UK industrial production numbers. Compared to forecasts of 0.2% growth, the industrial sector shrunk by -0.1% in January, largely driven by a sharp -0.5% drop in manufacturing output. Analysts commented that the recent appreciation in Sterling against the Euro could have contributed to the downtick in manufacturing by making British goods more expensive to European buyers. The figure could have been even worse had it not been for a strong 2.0% rise in mining and quarrying, which was largely driven by a rebound in north sea oil extraction.
During the afternoon it was reported by the National Institute of Economic and Social Research (NIESR) that the British economy probably grew by 0.6% in the three months to February. Although this was slightly below the median market consensus of 0.7%, it did not have as much of a downward impact on Sterling as the morning’s industrial output report.
Euro
The Pound to Euro exchange rate struck its sixth seven-year high in seven days yesterday. It was the same old story of Greek exit fears, weak demand for Eurozone government debt due to the European Central Bank’s quantitative easing programme, deflation anxieties and the prolonged fallout of the Swiss National Bank’s decision to stop purchasing large numbers of Euros on a day-to-day basis.
With four major factors working against it, plus the prospect of an eventual rate hike in the UK, the Euro is certainly in a bit of a pickle at the moment. But ECB President Mario Draghi commented yesterday that the bank’s new QE scheme was already having a positive impact on the currency bloc, which although a little premature – the programme has only been running for two days – does raise the possibility that economic prospects could begin to pick up in the region at some point in the future.
Right now it looks as if GBP/EUR will continue to strengthen in the near term but, with the exchange rate at such an elevated level, there is always the possibility that traders could look to lock-in profit and subsequently bring about a rebound in the single currency.
US Dollar
Yesterday’s weak UK industrial production numbers had a decidedly downward impact on the Pound to US Dollar exchange rate. GBP/USD declined by over 150 pips on the day, sliding through significant support at 1.50 to its lowest level for 20 months.
If ‘Cable’ remains below 1.50 for the duration of today’s session then it could pave the way for further gains for the ‘Greenback’, which is currently being propelled higher by an engine of Federal Reserve rate hike bets. The current consensus is that the US central bank will start raising rates in June of this year but there are still those who feel that the Fed could delay until the start of 2016. If upcoming Fed policy statements do not include the word ‘patient’ with regards to hiking rates, then these doubters could be converted into believers and the US Dollar could rally further against the Pound.
Alternatively, we could easily see Sterling surge back through the 1.50 level later today, which could set off another period of positive GBP/USD sentiment.
Canadian Dollar
The Pound tumbled by 90 pips against the Canadian Dollar yesterday following the downbeat UK industrial output score, however, the chances are that Britain will still manage to post accelerated growth of around 0.7% in the first quarter of 2015, up from 0.5% in the fourth quarter of 2014. The medium term GBP/CAD outlook appears to be weighted in favour of Sterling because it remains to be seen how well the Canadian economy can cope with such a sharp drop in the price of its most lucrative export – crude oil. Many speculative traders expect the Bank of Canada to act again at some point this year.
Australian Dollar
Sterling struggled against the Australian Dollar yesterday even though Reserve Bank of Australia Assistant Governor Christopher Kent appeared to keep the door open to future rate cuts by commenting that the domestic currency is still ‘relatively high’ given the current state of the economy. The RBA left rates at the current record low of 2.25% last week but, like with the BoC, there are a number of market participants who expect the Australian central bank to loosen policy further over the coming months and this is liable to weigh over the ‘Aussie’.
New Zealand Dollar
GBP/NZD plummeted by over three cents last night as Antipodean investors breathed a sigh of relief when the Reserve Bank of New Zealand announced that it was to leave rates on hold at 3.50% in March. RBNZ Governor Graeme Wheeler stoked demand for the ‘Kiwi’ by promising a period of interest rate stability for up to two years, which assuaged fears of the RBNZ joining a list of 18 other central banks who have slashed rates so far in 2015.
Data Released Today
GBP Visible Trade Balance (Pounds) (JAN)
EUR Euro-Zone Industrial Production w.d.a. (YoY) (JAN)
USD Advance Retail Sales (FEB)
CAD New Housing Price Index (YoY) (JAN)
GBP BOE Governor Carney Delivers Speech in Sheffield, England
USD Business Inventories (JAN)