Headlines
UK inflation hits zero –
BoE’s Carney suggests rates could rise.
Pound hits week-high vs. Euro –
Greek parliamentary vote on tap.
Strong UK wage data expected –
GBP/USD rallies 100 pips.
GBP/CAD hits new 6-yr high –
BOC expected to cut rates this afternoon.
Sterling
It was reported yesterday morning that the UK inflation rate dipped back to zero in June. But demand for the Pound surged before midday in response to upbeat comments from Bank of England Governor Mark Carney on the subject of monetary policy. Discussing interest rates publicly for the first time since May the Governor suggested that British households should start preparing for higher interest rates in the near future:
‘The point at which interest rates may begin to rise is moving closer with the performance of the economy’, said Carney. The Governor lauded Britain’s fast growth rate and described the soft consumer price index as ‘disinflation imported from abroad’.
The Pound raced higher against the majors in response the BoE chief’s comments and the UK currency gained more support during the evening when bank official David Miles suggested that the BoE would not be waiting for the Federal Reserve to make the first move. Sterling could push further ahead today if data shows, as forecast, that British wage growth accelerated from 2.7% to a new five-year high of 3.3% in May.
Euro
The Pound to Euro exchange rate rose by around 75 pips yesterday to strike a fresh fortnightly high as investors bought into Sterling following Mark Carney’s hawkish remarks on monetary policy.
Eurozone industrial production printed disappointingly at 1.6% compared to forecasts of 2.0% and German CPI remained at 0.3% but traders were generally disinterested in the European economic calendar because Greek issues remained centre stage.
Amid a maelstrom of criticism aimed at the Greek deal from all walks of life – German taxpayers to Greek students, political analysts to financial journalists – there was one voice that stood out from the crowd yesterday: the International Monetary Fund. A report surfaced indicating that, according to the IMF, much deeper debt relief is needed to bring Greece back onto the path to fiscal sustainability.
The report indicated that Greece’s debt-to-GDP ratio would hit 200% in the next two years unless measures were put in place to ease the Hellenic nation’s debt burden. The Fund posited that either ‘deep upfront haircuts’ or annual transfers of cash to Greece would be needed and suggested that Athens needs to borrow at AAA interest rates to avoid exacerbating the current cycle of debt unsustainability.
Despite the IMF’s concerns the subject of debt relief remains absent from the Eurogroup’s plans – at least until officials are happy that Greece has implemented the changes that Greek PM Alexis Tsipras agreed to over the weekend.
So, the next hurdle is today’s Greek parliamentary vote. Analysts expect Tsipras to push the tough reforms through parliament but he will be relying on opposition parties for votes. If the bill fails then the single currency could weaken as ‘Grexit’ fears jump right out of the box they were supposed to have been locked in when Tsipras surrendered fiscal sovereignty on Monday morning.
US Dollar
Sterling strengthened by around a cent against the US Dollar yesterday in reaction to BoE Governor Mark Carney’s encouraging comments on the possibility of a rate hike from the UK central bank sometime soon.
The ‘Greenback’ was let down by a worse-than-expected US retail sales result of -0.3%, which was seen as a sign that economic growth could have begun to moderate at the end of the second quarter. Some analysts reckon that the Federal Reserve will start raising rates in September but yesterday’s data, along with other indicators, could mean that the US central bank waits until December to begin its long-awaited hiking cycle.
Sterling could garner more support this morning if the latest UK labour market report shows a sturdy increase in British wages, as expected.
Canadian Dollar
The Pound rallied by around a cent against the Canadian Dollar yesterday to strike a new six-and-a-half-year high as UK rate hike bets propelled the world’s oldest currency higher across the board.
And with UK labour market data set to impress this morning and the Bank of Canada tipped to cut interest rates, it is highly likely that we could see Sterling grind out more of a gain against the risk-sensitive ‘Loonie’. Markets anticipate a -25 basis point cut from the BOC, which would put Canadian interest rates on par with British at 0.50%.
If the BOC does indeed cut rates the ‘Loonie’ could weaken significantly. But if the bank opts to remain on the sidelines then the Canadian Dollar could recoup losses.
Australian Dollar
The Pound to Australian Dollar exchange rate remained close to six-year highs yesterday as hawkish policy remarks from BoE Governor Mark Carney supported strength in Sterling.
An index of Australian business confidence printed sturdily at 10, up from 8 previously, which gave the ‘Aussie’ a little bit of respite. But the Pound looks likely to rack up more gains today if UK wage data impresses.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate rallied by over 200 pips yesterday but Sterling was forced to give back most of its gains during the afternoon. However, a robust British labour market report this morning could easily give traders the nod to drive Sterling higher again later today.
Data Released Today
09:30 GBP ILO Unemployment Rate (3M) (MAY) Medium 5.5%
09:30 GBP Weekly Earnings (3M/YoY) (MAY) Medium 3.3%
14:15 USD Industrial Production (JUN) Medium 0.2%
15:00 CAD Bank of Canada Rate Decision (JUL 15) High 0.50%
15:00 CAD Bank of Canada Releases Monetary Policy Report High
15:00 USD Yellen Delivers Semi-Annual Testimony to House Financial Panel High