Headlines
Dud domestic data hurts Pound –
Production slumps, deficit stretches.
BoE statement on tap –
Investors eye rate hike clues.
World Bank urges Fed to leaves rates low –
FOMC decision next week.
BoC leaves rates on hold –
Talks down prospect of further easing.
Sterling
Dud domestic data ensured the Pound was unable to replicate its strong start to the week during yesterday’s trading session.
British industrial production printed at -0.4% and manufacturing output fared even worse with a -0.8% monthly contraction. An earlier-than-usual summer factory shutdown, the strong Pound and weaknesses in Britain’s main export markets were blamed for the disappointing figures.
The UK trade balance also underwhelmed, with the deficit rising from -£8.5 billion to -£11.1 billion. Exports of goods plunged by -9%, the worst fall since July 2006, to which analysts commented that more needs to be done by the government to support the ailing export sector and rebalance the economy.
Sterling softened versus most of the majors following the results as traders pushed back their Bank of England rate hike bets. There is likely to be a lot of volatility during the afternoon as markets react to any signs of future policy direction in the Bank of England’s latest statement.
Euro
The Pound registered some minor gains against the Euro yesterday despite the downbeat domestic figures.
The Bank of England is due to announce its benchmark interest rate for September later today. The bank is widely expected to leave rates on hold at this moment in time, so investors will be looking for clues of future policy direction. The majority of traders anticipate a dovish statement, with Governor Mark Carney citing fears that deflationary pressures emanating from China could dampen the UK’s already soft inflation prospects. This would likely cause the Pound to depreciate against the Euro. However, the last time Carney spoke about monetary policy he argued that Britain was relatively insulated from shocks in China and suggested that rates could rise in the first quarter of next year. If the Governor strikes a similarly hawkish tone this time out then we could see GBP/EUR surge.
US Dollar
Sterling softened against the US Dollar yesterday in reaction to the disappointing UK domestic ecostats but GBP/USD only declined by around a quarter of a cent because US rate hike bets also stumped yesterday in response to a statement from the World Bank.
The World Bank’s chief economist Kaushi Basu urged the Federal Reserve to leave interest rates at record lows until the global economy is in better shape to avoid triggering ‘panic and turmoil’ in emerging markets. The prospect of a Fed hike in September was pretty slim already but it seems that even the hawks who were holding out for higher rates were slightly spooked by the World Bank’s warning.
Another UK data release showed that gross domestic product probably shrunk from 0.7% to 0.5% in the three months through August.
Canadian Dollar
The Canadian Dollar appreciated by over 100 pips yesterday afternoon when the Bank of Canada announced that it was leaving interest rates on hold at 0.50% in September. However, the ‘Loonie’ gave back around half of its gains before the end of the North American session.
BOC Governor Stephen Poloz appeared comfortable with the current level of policy accommodation, mentioning that July’s rate cut is still working its way through the economy and this also worked in the Canadian Dollar’s favour.
Australian Dollar
The Pound to Australian Dollar exchange rate dipped by around half a cent yesterday as markets reacted to uninspiring domestic data in the UK and the prospect of additional stimulus measures in Asia.
Both Chinese and Japanese officials talked up stimulus prospects yesterday. China vowed to boost infrastructure spending and streamline tax reform whilst Japan pledged to cut corporation tax by -3.3%. The accommodative measures were seen to bolster growth prospects in the region, which subsequently boosted the appeal of the risk-sensitive Australian Dollar.
New Zealand Dollar
The Pound plunged by around -270 pips against the New Zealand Dollar during the day yesterday as markets piled back into riskier assets on the hope that enhanced stimulus in China and Japan would support growth in the Asia Pacific region.
However, GBP/NZD rallied by 500 pips when the Reserve Bank of New Zealand cut interest rates by -25 basis points.
Data Released Today
12:00 GBP Bank of England Rate Decision (SEP 10) High 0.50%
15:00 USD Wholesale Inventories (JUL) Medium 0.3%