Headlines
BoE’s Carney suggests rate hike by end of 2015 –
Boosts Pound Sterling.
Pound hits 7-yr high versus Euro –
Best level since before the crash.
US inflation rises to 0.1% –
But wages slow to 1.8%.
GBP/CAD hits new 6-yr high –
GBP/NZD close to 5.5-yr high.
Sterling
The Pound struck a fresh seven-year high against a basket of its most-traded currency peers on Friday as markets continued to invest in Sterling positions due to increased bets of a rate hike from the Bank of England.
The latest surge in demand for the Pound came as BoE Governor Mark Carney suggested that we could see British borrowing costs begin to rise around the time of the New Year, which caused speculative investors to bring forward their rate forecasts and subsequently push the Pound higher versus the majors.
The most important event to look out for on the economic calendar this week is Wednesday’s BoE minutes report. The central bank literature is likely to show a marked increase in rate hike rhetoric and the Pound could rally if it emerges that some policymakers voted for a rate rise at the beginning of the month.
Euro
With Sterling trading at its strongest level against the Euro since 2007 – before the credit crunch ravaged financial markets – now is a very good time to exchange Pounds for the single currency.
Friday saw GBP/EUR strengthen by over half a cent despite the supposedly ‘good news’ that European parliaments had voted to approve a €7 billion bridging loan to Greece that should pave the way to a third bailout package in the region of €86 billion.
German Chancellor Angela Merkel and finance minister Wolfgang Schaeuble remained defiant in the face of criticism from the US. Former Fed President Ben Bernanke posited that Greece should be cut some slack because previous bailouts were based on flawed projections for growth in the Eurozone as a whole. Bernanke argued that Germany’s reluctance to spend any of its enviable trade surplus threatened to choke demand in less-developed members of the currency bloc.
Meanwhile former IMF director Ashoka Mody went as far as suggesting that Germany should be the country to exit the Euro, not Greece, in order to improve competitiveness across the 19-nation bloc. Although such talk is grounded in economic theory, the chance of Germany standing down is about as strong as the possibility of Greece’s latest economic reforms leading to fiscal sustainability.
US Dollar
Sterling remained sturdy against the US Dollar on Friday as American inflation ticked higher from zero to 0.1% but consumer confidence sunk from 96.1 to 93.3.
The ‘Greenback’ drew support from the minor uptick in consumer prices but traders were less impressed with the surprise dip in the University of Michigan’s consumer confidence report for July. The ‘Buck’ was also negatively impacted by a report showing that US wages declined from a negatively revised 2.2% to 1.8% in June, which appeared to make the prospect of a September rate hike from the Federal Reserve even less likely.
Current market pricings, and indeed recent central bank statements, suggest that both the BoE and the Fed could start raising interest rates in either December or January.
The Pound to Canadian Dollar exchange rate rose to a fresh six-year high on Friday as the impact of the Bank of Canada’s recent decision to slash interest rates continued to make waves in the currency market.
Data out of the North American economy showed that consumer prices increased at a rate of 1.0% in June, up from 0.9% in May. It was a 3.4% rise in food prices that sent the Canadian CPI higher but demand for the commodity-sensitive currency remained restricted due to a further -14.1% dip in gasoline prices.
Australian Dollar
The Pound rallied by around 150 pips against the Australian Dollar on Friday but couldn’t quite make it to a new six-year high. But, thanks to BoE rate hike bets spiking towards the end of last week’s session, Sterling managed to retain an elevated exchange rate against the high-beta ‘Aussie’. Concerns over growth in China, Australia’s largest trading partner, paired with the prospect of a rate rise in the US ensured that Sterling remained close to its highest level since 2009 against the Antipodean currency.
New Zealand Dollar
The Pound traded close to a five-and-a-half-year high against the New Zealand Dollar on Friday but failed to strike any further gains as investors paused to consider valuations of the ‘Kiwi’.
The New Zealand Dollar is currently trading at a ‘Goldilocks’ level against the US Dollar, defined by PM John Key as the sweet spot, neither too high nor too low. It will be interesting to see whether the ‘Kiwi’ continues to weaken or whether markets opt to start buying back into the Antipodean currency over the next few weeks.
Data Released Today
There are no significant data releases on the schedule today