Headlines
Strong CBI retail sales support Sterling –
Firms most optimistic for 26 yrs.
GBP/EUR hits 2.5-month high –
‘Grexit’ fears escalate.
Pound down -100 pips vs. US Dollar –
On Fed rate hike bets.
GBP/AUD close to 6-yr high –
Risk appetite down on Fed hike speculation.
Sterling
The Pound benefitted from some sturdy retail sales data yesterday and was able to rally against most of the majors in response. The Confederation of British Industry (CBI) announced that UK firms are currently more confident about the upcoming month than at any point in the last 26 years. Low (negative) inflation and a long awaited uptick in wage growth helped drive the retail index up from +12 to +51 in May. And it is likely that this trend could continue throughout the year as consumers continue to take advantage of subdued price pressures.
But whilst the UK retail sector is heating up, the manufacturing industry remains painfully weaker than its pre-crisis peak and business owners are starting to fear that David Cameron’s in/out EU referendum could lead to a period of damaging uncertainty. The EEF group, which accounts for around 20,000 firms, urged the government to ‘get on with’ their planned referendum as soon as possible, to limit the negative impact of speculation.
Euro
The Pound to Euro exchange rate struck a two-and-a-half-month high yesterday as markets upped their bets that Greece could leave the Eurozone.
Traders were concerned by comments from Greek energy minister Panagiotis Lafazanis suggesting that ‘it would not be a catastrophe to exit the Euro’. And finance minister Yanis Varoufakis made matters worse by claiming that more austerity is not the answer: ‘our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease’. ‘Grexit’ speculation intensified following these comments and the single currency sunk to its lowest level since the beginning of March against Sterling.
Political uncertainty in Spain also weighed on the Euro, as anti-austerity activists received high levels of support in regional elections: an anti-poverty campaigner became the Mayor of Barcelona and radical left-wingers secured second spot in Madrid.
US Dollar
Sterling lost out against the US Dollar yesterday as markets shifted from bearish to bullish with regards to the ‘Greenback’. GBP/USD shed almost a cent on hopes that the Federal Reserve will start to normalise monetary policy later on in the year. Fed Chair Janet Yellen commented last Friday that rates would rise, provided domestic data recovers from the recent slump. And hopes of a 2015 rate hike were bolstered by news that US durable goods orders, minus volatile aircraft sales, rose 1.0% in April. The stronger-than-anticipated figure was accompanied by positive revisions to previous months’ scores, which also helped raise demand for the ‘Greenback’.
Separate reports showed that consumer confidence increased from 94.3 to 95.4 in May and that service sector performance slowed from 57.4 to 56.4. But, overall, the market appeared to view the US economy through rose-tinted spectacles and subsequently the Dollar rallied versus the majority of its most-traded currency counterparts.
Canadian Dollar
Sterling strengthened by around a cent to a fresh two-month high against the Canadian Dollar yesterday, striking its highest level since the beginning of March as investors began to speculate that the Federal Reserve could tighten lending conditions sooner rather than later.
Higher interest rates in America could lead to reduced liquidity in financial markets, which, in turn, could cause investors’ appetite for risk to dampen. And this would most likely lead to a drop-off in demand for the ‘Loonie’.
Later this afternoon the Bank of Canada is set to hold its benchmark interest rate at 0.75%, but a surprise reduction could have a significant downward impact on the domestic currency.
The Pound to Australian Dollar exchange rate surged by around 150 pips to a near-six-year high yesterday. It seems that Sterling’s ascent was helped by decent retail sales data out of Britain, but also by the sturdy US durable goods orders print, which gave rise to a flurry of Fed rate hike bets. Naturally, speculation of tighter monetary policy in the world’s largest economy weighed on the ‘Aussie’ as traders envisioned a period of depressed risk appetite.
New Zealand Dollar
The Pound also strengthened significantly against the New Zealand Dollar yesterday, rallying over 170 pips on fears that the US central bank could stop providing financial traders with ultra-low interest rate loans at some point later in the year.
Data Released Today
15:00 CAD Bank of Canada Rate Decision (MAY 27) High