Headlines
UK CPI hits -0.1% –
1st negative inflation score since 1960.
Euro declines on accelerated ECB QE –
ECB to up bond-buying temporarily.
GBP/USD loses -150 pips –
20% surge in US housing starts.
RBA keeps door open to further rate cuts –
Avoids giving forward guidance.
Sterling
The Pound avoided any consequential losses yesterday despite the fact that British inflation fell into negative territory for the first time since 1960. Analysts and politicians were quick to point out that what Britain is currently experiencing is a case of ‘good’ rather than ‘bad’ deflation. This is because the dips were primarily witnessed in food and energy prices; because consumer demand remains high; and because wages are currently improving. Britons were urged to appreciate this period of lower prices rather than focus on the potential impact of ‘bad’ deflation if the situation were to deteriorate, which is not expected because the impact of Sterling’s recent appreciation and last year’s plunge in oil prices is likely to reverse later on in the year.
Sterling did lose ground against most of the majors, but traders were not too concerned by the -0.1% CPI report.
Euro
The Pound actually strengthened against the Euro yesterday as although Eurozone CPI printed higher than British inflation at 0.0%, holders of the Euro were moved to sell by news that the European Central Bank intends to speed up its quantitative easing programme over the next few months.
Senior ECB policymaker Benoit Coeure said that the bank would accelerate its monthly asset purchasing scheme to avoid the summer lull, when market liquidity is traditionally ‘notably lower’. The single currency declined following the announcement, which controversially had been made to a select group of investors the night before, as traders anticipated an enhanced period of suppressed Eurozone bond yields.
In other news, European Commissioner Jean-Claude Juncker denied the existence of a proposal to reduce Greece’s austerity burden and June 5th was identified as the last viable day that a debt talk breakthrough could help keep the Hellenic nation in the 19-nation bloc.
US Dollar
However, Sterling did soften against the US Dollar yesterday. The negative UK consumer price index report, combined with some sturdy US ecostats, allowed the ‘Greenback’ to register a 150-pip gain against the Pound.
GBP/USD sustained most of its losses during the morning when the UK CPI numbers were released, which were seen to alleviate some pressure on the Bank of England to raise interest rates. But sentiment towards ‘Cable’ continued to soften during the afternoon thanks to a bumper 10.1% increase in building permits and a rocket-fuelled 20.2% surge in housing starts. Following the recent run of soft US data, the reports provided the ‘Greenback’ with a much-needed boost.
Canadian Dollar
The Pound to Canadian Dollar exchange rate closed for the day around -25 pips lower than it began yesterday as negative UK inflation and falling oil prices impacted GBP/CAD. A rise in the relative strength of the US Dollar weighed on crude oil prices and this limited the ‘Loonie’s’ ability to appreciate against Sterling.
Markets are looking towards this morning’s BoE minutes report for policy direction clues, however, there is little chance of any groundbreaking news seeing as it was only last week that Governor Mark Carney released the bank’s quarterly inflation report.
Australian Dollar
Surprisingly, the Australian Dollar did not run into too much trouble yesterday even though the Reserve Bank of Australia confirmed in its latest minutes report that further interest rate cuts were still on the cards. The Australian central bank indicated that it was concerned with the slowdown in Chinese economic output, as well as by potential problems in the jobs market, but stopped short of releasing any new guidance and this worked in the ‘Aussie’s’ favour.
New Zealand Dollar
The New Zealand Dollar strengthened by around a cent and a half against Sterling yesterday thanks to a slight rise in the Reserve Bank of New Zealand’s latest inflation projections, from 1.80% to 1.85%. The disinflationary UK CPI report also weighed on GBP/NZD.
Data Released Today
09:30 GBP Bank of England Minutes Medium
19:00 USD U.S. Fed Releases Minutes from April 28-29 FOMC Meeting Medium