Headlines
Sterling suffers on rate cut fears
– BoE’s Haldane sees 50⁄50 chance cut or hike.
Greek concerns weigh over single currency
– Greek bank accounts drained.
GBP/USD bounces lower
– Fed hike outlook more positive than BoE.
Pound flat vs. commodity bloc
– Fed hike probability stymies risk rally.
Sterling
The Pound stuttered again yesterday in reaction to comments from Bank of England chief economist Andy Haldane. He suggested that interest rates are just as likely to be reduced as they are to be raised over the next few months. Mr Haldane argued that with inflation dropping ‘like a stone’ over the past year and Sterling rising to multi-year highs versus many of the majors, the ‘chances of a rate rise or cut are broadly evenly balanced’.
Naturally, these dovish remarks hurt the Pound. However, in all seriousness the likelihood of the ‘Old Lady’ slashing its benchmark interest rate looks very slim, given that BoE Governor Mark Carney stated only last week that it would be ‘extremely foolish’ to counter the recent drop in inflation expectations with further stimulus, due to the inevitable volatility that this would cause.
Euro
Ubiquitous anxieties regarding Greece’s future in the currency bloc compromised demand for the single currency yesterday morning, however, Sterling was forced to hand over its gains like a naughty school child caught with a bag of doughnuts in class when BoE policymaker Andy Haldane commented on the potential for a reduction in UK interest rates.
Talks between EU leaders and Greek government officials were predictably abrasive and little progress was made. Markets were concerned with news that over €300 million was removed from Greek banks yesterday – the largest outflow since the Hellenic nation secured an extension to its bailout programme last month. It is thought that Eurogroup President Jeroen Dijsselbloem’s suggestion that capital controls may have to be employed in Greece spooked investors and triggered the exodus of bank funds. Ironic really, as an exodus of bank funds is the specific problem that capital controls are designed to prevent.
US Dollar
The Pound to US Dollar exchange rate tumbled by around 200 pips yesterday, giving back all of its post-Fed policy statement gains, as traders came to terms with the Federal Reserve’s rate hike outlook.
It seems that Wednesday evening’s US Dollar rout was deemed overdone, and that investors still foresee a possible Fed rate hike in June. If the US unemployment rate tumbles one percentage point in each of the next three months then the jobless rate will hit the US central bank’s new target and possibly prompt policymakers to tighten policy. Even if this doesn’t happen by June, there is a fairly good chance that it will happen by September.
So, even with talk of a BoE rate cut probably inaccurate, the prospect of a Fed rate hike in September and a BoE rate rise in the first quarter of 2015 – at the earliest – clearly bodes better for the ‘Greenback’ then the Pound.
Canadian Dollar
Demand for the Canadian Dollar crumbled yesterday morning when markets reconsidered the extent that Wednesday’s Fed statement should be interpreted as a dovish signal. This allowed Sterling to strengthen by around 140 pips against the risk-correlated Canadian Dollar. However, the Pound’s time at the top did not last long and GBP/CAD sunk to a near-two-month low as BoE rate cut fears dampened confidence towards the world’s oldest currency.
Australian Dollar
Because the Australian Dollar derives a lot of its strength from buyers who invest in the currency with money borrowed at cheap rates in the US to take advantage of the better yields available down under, the ‘Aussie’ is particularly vulnerable to shifts in economic sentiment and Fed rate hike expectations. So, as markets readjusted following Wednesday evening’s sharp dip in Fed rate hike bets, the Australian Dollar suffered more than most, leaving GBP/AUD up 50 pips on the day despite Andy Haldane’s dovish comments.
New Zealand Dollar
Sterling failed to hold onto its early morning gains against the New Zealand Dollar yesterday as traders reacted negatively to BoE policymaker Andy Haldane’s remarks on the possibility of a reduction in rates. Because the ‘Kiwi’ Dollar benefits from a higher benchmark interest rate of 3.50%, compared to Australia’s 2.25%, the New Zealand Dollar found it slightly easier to attract investors during yesterday’s session.
Data Released Today
09:30 GBP Public Sector Net Borrowing (Pounds) (FEB) Medium
12:30 CAD Consumer Price Index (YoY) (FEB) High
12:30 CAD Retail Sales (MoM) (JAN) Medium