Headlines
Pound down on Osborne austerity announcement –
Government borrowing lowest in June since 2008.
BoE minutes report on tap –
Sterling could rise on hawkish sentiment.
GBP/EUR down –
Euro recovers 150 pips.
GBP/CAD close to 6-yr high –
RBNZ rate decision on tap.
Sterling
The Pound suffered a little yesterday as traders reacted to Chancellor George Osborne’s latest statement of intent. The Tory MP vowed to find a further £20 billion worth of spending cuts by November 25th in a bid to ‘eliminate the deficit’. Sterling suffered because markets were worried that the latest raft of austerity cuts could suffocate economic growth and therefore delay the Bank of England’s first piece of monetary tightening since 2007.
Back in 2010 the Conservative-led coalition vowed to eradicate the deficit by 2015 but despite fierce welfare cuts and reductions in public spending Britain’s national debt is currently £1.5 trillion, which is over 80% of GDP. The deficit is slowly shrinking, however, and the latest figures showed that government borrowing for June fell to its lowest level since 2008 thanks to a bumper month of income and corporation tax receipts.
Today’s Bank of England minutes report could give the Pound a boost if it shows that policymakers are keen to start raising rates in the near future. However, the fact that the meeting in question took place at the beginning of the month, during the worst of the recent Greek debt negotiations, means there is every chance that the report could be tinged with fear of a ‘Grexit’. This could potentially mean that sentiment in the report is a lot less hawkish than Governor Carney’s remarks last week on the possibility of a rate hike around the turn of the year.
Euro
The Pound to Euro exchange rate slid by around -150 pips yesterday as profit-taking allowed the single currency to recover some of the losses sustained last week.
Sterling was hurt by Chancellor Osborne’s latest vow to cut the budget deficit by reducing public spending and the Euro was supported by the relative calm in Greece. The next move in GBP/EUR will likely be driven by this morning’s BoE report. It will be interesting to see how markets react to the publication of the minutes. A hawkish statement would most likely lead to another strong Sterling rally but the Pound could be hurt by cautionary remarks.
US Dollar
‘Cable’ traded marginally lower yesterday as the threat of further austerity led to a minor downgrade to BoE rate hike estimates.
However, Sterling lost less ground to the US Dollar than any of the other majors because the prevailing view around financial marketplaces is that the time difference between the Federal Reserve’s and the Bank of England’s first rate hikes will be very small, if anything at all. The ‘Greenback’ had struck a five-year high against the Pound earlier on in the year when it looked like US policymakers were gearing up for a tightening of monetary policy much earlier than the BoE.
Canadian Dollar
A slight rise in oil and gas prices helped the Canadian Dollar register a much-needed 80-pip gain against the Pound yesterday. The ‘Loonie’ was able to rally amid a day of profit-taking and concerns regarding the possibility of British growth being impacted by an additional £20 billion of austerity cuts. Nevertheless, GBP/CAD still remains close to its strongest rate since September 2008.
Australian Dollar
The Pound plunged by almost -200 pips against the volatile Australian Dollar yesterday as investors used George Osborne’s latest austerity announcement as an opportunity to cash-in on profits from Sterling’s meteoric rise against the ‘Aussie’ over the last few weeks. GBP/AUD is currently six cents higher than it was at the beginning of the month and is still trading close to a significant multi-year high.
New Zealand Dollar
Sterling softened by over two cents against the New Zealand Dollar yesterday, however, the high-beta ‘Kiwi’ could easily decline later this evening if the Reserve Bank of New Zealand cuts interest rates as expected. Markets anticipate a -25 basis point reduction, which would take the RBNZ benchmark rate to 3.00% and would likely cause a sharp deterioration in the value of the Antipodean currency. Alternatively, the ‘Kiwi’ Dollar could rally if the RBNZ opts to leave rates unchanged at 3.25%.
Data Released Today
09:30 GBP BOE Publishes Minutes of Monetary Policy Committee Meeting Medium
22:00 NZD Reserve Bank of New Zealand Rate Decision (JUL 23) High 3.00%