Headlines
UK GDP prints at 0.7% –
Service sector output drives growth.
GBP/EUR rallies 100 pips –
Greek negotiations begin amid intense police presence.
Fed policy announcement due this evening–
Fed could push hike bets to December.
GBP/CAD close to 6.5-yr high –
Pound hits new 6-year high vs. ‘Aussie’.
Sterling
Good news: Britain’s economy bounced back in the second quarter with a growth rate of 0.7%. Even better news: the upbeat GDP report took UK economic output per head back above the pre-crisis peak registered at the beginning of 2008.
The majority of the nation’s economic gains came in the dominant services industries, which accelerated 0.5%. Disappointingly, the manufacturing sector suffered a -0.3% quarterly contraction as Chancellor George Osborne’s fabled ‘March of the Makers’ failed to materialise. It seems that a combination of the strong Pound and the Greek crisis weighed on manufacturing firms’ ability to export to the Eurozone.
The Pound rallied versus most of the majors following the GDP announcement as investors upped their forecasts for when the Bank of England will start raising interest rates. The consensus is that officials will vote to hike rates sometime between January and March next year.
Euro
Volatility in the Pound to Euro exchange rate appears to have quietened down now that Greece looks likely to remain economically solvent thanks to the latest package of draconian austerity measures. This left the exchange rate to trade to the beat of fundamentals, which yesterday meant that Sterling appreciated by around a cent in reaction to the 0.7% QoQ, 2.6% YoY second quarter GDP report.
European officials began discussing the details of the proposed aid package yesterday amid a heavy security presence. Following concerns last Friday that a hotel may not be appropriate, given the importance of the issues on the table as well as the widespread public opposition to the programme, a team of 250 police officers and a police helicopter were deployed to oversee the first day of negotiations.
US Dollar
The Pound to US Dollar exchange rate rallied initially by around half a cent yesterday morning in direct response to the sturdy UK growth report.
During the afternoon it was reported that US service sector output increased at a rate of 55.2 in July but the sanguine result was tempered by a disappointing drop from 99.8 to 90.9 in the US consumer confidence index.
Demand for the ‘Greenback’ is likely to be dictated by this evening’s meeting of Federal Reserve officials. Markets do not anticipate a rate hike this time out but there is still a fairly large contingent of hawkish speculators who expect the Fed to begin tightening in September. If the central bank uses tonight’s announcement as a platform to prepare traders for a rate hike in September then demand for the US Dollar could soar and GBP/USD could weaken. However, if the Fed opts to push back rate hike expectations to December then we could see a little bit of repositioning in the market and Sterling would likely strengthen against the ‘Buck’.
Canadian Dollar
The already bullish Pound to Canadian Dollar exchange rate tip-toed higher by around a third of a cent yesterday morning thanks to the latest piece of robust UK economic data. The acceleration from 0.4% to 0.7% in the second quarter suggests that the UK economy could be getting closer to a time when interest rates will begin to rise. The Canadian economy, on the other hand, is suffering from a second wave of deflation in the commodity markets, which threatens to prompt further monetary easing from the Bank of Canada.
GBP/CAD bounced lower during the afternoon but is still currently trading just below a six-year high.
Australian Dollar
Sterling struck a fresh six-year high against the Australian Dollar yesterday but demand for the Pound tailed off afterwards as a breach of technical levels set off a sequence of profit-taking trades.
But with commodity prices tumbling, huge volatility in China and US and UK interest rates likely to rise around the turn of the year, the future does not look great for the Antipodean currency. A round of interest rate cuts in the second half of the year could easily keep GBP/AUD at six-year highs and possibly lead to further gains for the Pound.
New Zealand Dollar
Sterling dipped by around -150 pips against the New Zealand Dollar yesterday as profit-taking continued to take the Pound lower from the multi-year high that it struck a fortnight ago. Nevertheless, GBP/NZD is currently trading over 3,200 pips higher than it was at the beginning of 2015.
Data Released Today
09:30 GBP Mortgage Approvals (JUN) Medium 66.0K
19:00 USD Federal Open Market Committee Rate Decision (JUL 29) High 0.25%