Headlines
BoE minutes report lifts Sterling –
Rates could rise in a year.
Greek default looms large over Euro –
GBP/EUR up a cent.
Fed talks down June rate hike –
‘Cable’ rallies.
GBP/NZD up 2 cents –
Fears of RBNZ rate cut weigh.
Sterling
The Pound moved broadly higher against a basket of its most-traded currencies yesterday as markets reacted to a fairly sanguine minutes report from the Bank of England. The central bank literature indicated that interest rates would likely rise in around a year’s time – as stated last week – but investors were most cheered by the suggestion that two policymakers had considered voting for a rate hike in May. Martin Weale and Ian McCafferty only recently stopped voting for tighter monetary policy when inflation started nosediving, and it is highly likely that it was these two bank officials whose decision to hike or hold rates was ‘finely balanced’.
However, it may take a lot more convincing for the rest of the Monetary Policy Committee (MPC) gang to agree that Britain is ready for tighter lending conditions – especially considering that UK CPI dipped below zero earlier in the week.
Euro
An escalation of Greek exit fears took the Pound higher by around a cent against the Euro yesterday, as Greece warned that it could default on an upcoming IMF payment if a deal is not agreed with its lenders.
Investors were spooked by the explicit mention of a Greek default from within the ruling Syriza party and matters were made worse by rumours of a potential mutiny within the radical left-wing party. The fear is that, with just two weeks left to reach an agreement, PM Alexis Tsipras won’t be able to push a deal through parliament, even if he is able to agree on new austerity measures with the nation’s creditors. The latest developments appear to position Greece closer than ever to the unknown abyss of Euro expulsion and, understandably, this is making traders anxious about investing in the single currency.
This morning’s Eurozone private sector PMI report is tipped to show that output remained sturdy at 53.9 at the beginning of May but the Euro will likely remain depressed unless Greek debt talks miraculously improve.
US Dollar
Sterling rallied against the US Dollar during the London session yesterday as markets reacted favourably to the modestly hawkish minutes report from the Bank of England.
And demand for the ‘Greenback’ remained soft during the evening when Federal Reserve policymakers confirmed that an interest rate hike as early as June was unlikely.
Today’s session is likely to be coloured by April’s UK retail sales report, which is tipped to show a month-on-month rise of 0.4%, but markets could also be motivated by the US manufacturing PMI report if it deviates from the market consensus of 54.5.
Canadian Dollar
The Pound to Canadian Dollar exchange rate remained fairly flat yesterday as a slightly upbeat BoE minutes report supported Sterling but a dovish Fed statement raised investors’ appetite for risk. Although the majority of investors did not expect the US central bank to start raising rates in June, the fact that Fed officials explicitly talked down the possibility of an early rate hike was seen as a positive signal for asset classes such as the ‘Loonie’, which rely on cheap lending conditions to attract speculative investors.
Sterling strengthened by around a cent and a half against the Australian Dollar yesterday as mild Reserve Bank of Australia rate cut fears continued to weigh on the Antipodean currency. The ‘Aussie’ was also hurt by a -1% drop in iron ore whilst the Pound drew support from the BoE minutes report, which showed that two policymakers had considered voting for a rate hike this month.
New Zealand Dollar
The ‘Kiwi’ Dollar also suffered at the hands of rate cut fears yesterday, declining by around two cents against the Pound as markets continued to price-in the possibility of the Reserve Bank of New Zealand slashing its benchmark lending rate by around -50 basis points over the next 12 months.
Data Released Today
09:00 EUR Markit Eurozone Composite PMI (MAY P)
09:30 GBP Retail Sales Inc Auto Fuel (MoM) (APR)
14:45 USD Markit US Manufacturing PMI (MAY P)