Headlines
Inflation remains at record low
– Core prices soften.
Euro industrial growth impresses
– ECB QE improving sentiment.
ECB’s Draghi to give speech
– Talk of Greece could hurt Euro.
GBP/USD rallies 150 pips
– Due to undershooting US retail score.
Sterling
Yesterday it was announced that UK inflation remained at a record low of 0.0% for the second month in a row during March. The Office for National Statistics (ONS) has been keeping official records since 1989 and before February the consumer price index had never reached zero, however, historical records show that inflation did dip below zero percent at the beginning of the swinging sixties. The Pound performed moderately well following the release because some analysts had been primed for a negative print.
Interestingly though the ONS report showed that if inflation were to be calculated to two decimal points then the CPI would actually have came in at -0.01%. But this was largely ignored by traders, as was a surprise drop in the core CPI figure from 1.2% to 1.0%, which suggests that falling global energy prices are trickling through into other areas of the economy.
In the long term the price cuts are considered good for the economy – a sort of unsolicited tax cut if you will. But in the short term they do little to bolster the appeal of the Pound because it is difficult to see the Bank of England raising interest rates whilst inflation is so far below the 2.0% target.
Euro
A surprise 1.6% jump in Eurozone industrial production boosted demand for the Euro yesterday. The robust figure quadrupled the previous month’s 0.4% increase and doubled the median market consensus of 0.8%, suggesting that the European Central Bank’s recently launched €1 trillion quantitative easing scheme is already beginning to have a positive impact. It is difficult to tell whether the actual purchasing of bonds has started to increase liquidity in the currency bloc but it is clear to see that sentiment has improved and that the Euro has depreciated – thus making industrial exports more competitive.
GBP/EUR rallied by around a third of a cent yesterday in response to the upbeat industrial output numbers and also thanks to the IMF’s decision to upgrade its Eurozone GDP forecast for 2015 from 1.2% to 1.5%.
Later this afternoon ECB President Mario Draghi is expected to maintain the bank’s current level of economic stimulus and comment on the performance – read: success – of his large-scale bond-buying programme. His speech could inspire demand for the single currency but if multiple references are made to the situation in Greece then we could see sentiment pivot the other way.
US Dollar
The Pound rallied by around 150 pips against the US Dollar yesterday thanks to the strongest American retail sales result for a year…because said result was lower than the majority of traders had been primed for.
Investors were gearing up for a sturdy improvement of 1.1% in March but the actual result disappointed at 0.9%. Although the retail sales number still marked an encouraging rebound on February’s -0.5% decline, the undershooting data played into a trend of softening economic expectations. Over the last month predictions of a Federal Reserve rate hike in June have shrunk over -20% to 10% whilst third quarter rate hike bets have surged from 40% to 50%. It is this change in interest rate dynamics that allowed Sterling to rally against the ‘Greenback’ yesterday afternoon.
Canadian Dollar
The Pound to Canadian Dollar exchange rate remained flat on the day yesterday ahead of this afternoon’s monetary policy announcement from the Bank of Canada. BOC Governor Stephen Poloz is widely expected to leave rates on hold at 0.75%. But unlike Bank of England meetings of recent months, and, indeed, years, the possibility of a surprise rate modification cannot be ruled out. The BOC shocked markets with a -25 basis point reduction in January and there are some market players who expect the bank to loosen monetary policy further in reaction to the collapse in crude oil prices. Poloz has explicitly stated that rates will remain on hold whilst policymakers assess the situation but his assurances of rate stability have left many unconvinced.
And even if, as the majority anticipate, Poloz leaves rates unchanged there is potential for a depreciation in the ‘Loonie’ if he strikes a markedly cautious tone.
Australian Dollar
Sterling rallied by around a third of a cent against the Australian Dollar yesterday as the fallout from Monday’s dismal Chinese trade report continued to weigh on projections for cross-trade between Australia and China. Being that China is Australia’s largest export market, the -12.7% drop in Chinese imports had a particularly dampening effect on demand for the ‘Aussie’.
New Zealand Dollar
GBP/NZD fluctuated with no real directional bias yesterday as traders reacted to the on-point zero percent UK inflation print. A score below zero could easily have knocked Sterling back but the Pound managed to successfully leap over this particular hurdle.
Data Released Today
EUR European Central Bank Rate Decision (APR 15)
EUR ECB to Hold Press Conference after Rate Decision
USD Industrial Production (MAR)
USD Manufacturing (SIC) Production (MAR)
CAD Bank of Canada Rate Decision (APR 15)
CAD Bank of Canada Releases Monetary Policy Report