Headlines
• UK unemployment falls to 5.5%
– Wage growth hits six-year high.
• Carney talks up rate increases
– Suggests Q2 hike.
• Eurozone inflation softens
– GBP/EUR up 130 pips.
• GBP/USD rallies 150 pips
– Ahead of key Fed rate announcement.
Sterling
The Pound stormed into life yesterday morning as investors were treated to a surprisingly strong UK labour market report.
The headline unemployment rate fell unexpectedly from 5.6% to 5.5% thanks to a 42,000 uptick in the number of Britons in work. The jobless rate was already deemed low enough to support tighter monetary policy before the surprise decline so this did not have a material impact on Bank of England rate hike bets. However, markets were more interested in the average earnings element of the report, which showed that wage growth accelerated at its fastest rate for six years in the three months to July. Earnings jumped from an upwardly revised 2.6% to 2.9%, which massively outshone analysts’ expectations of 2.5% and was seen to boost the chances of a positive decision from the UK central bank.
During the afternoon BoE Governor Mark Carney revealed that if UK economic growth remains above trend, wages rise above 3.0% and core inflation continues to increase then rates could begin to rise in the first quarter of next year. Taking into account the current performance of the British economy Carney stated that most members of the monetary policy committee expect the tightening cycle to begin in the second quarter. This bolstered the appeal of the Pound as some traders moved their rate hike bets forward from Q3 2016 to Q2 2016.
Euro
The Pound to Euro exchange rate rallied by around 130 pips yesterday in response to the sturdy UK labour market statistics, which, accompanied by positive rhetoric from BoE Governor Mark Carney, caused speculative investors to push forward their UK rate hike bets by around three months.
Other BoE policymakers struck a mixed tone, with Kristin Forbes hinting that she might vote for higher rates in the near future, Ian McCafferty reaffirming his hawkish stance that rates should rise now and Martin Weale suggesting that volatility in China meant that rates should stay flat for a little longer. Weale added that in his experience – and in statistical studies – it is often apparent that ‘independent inflation shocks tend to come like buses, more than one at a time’, which he felt made it safest for the central bank to wait on the sidelines for a little while longer.
It was reported yesterday that Eurozone inflation softened unexpectedly from 0.2% to 0.1% during August but traders were generally unmoved by the result because European Central Bank Chief Mario Draghi recently commented that further monetary stimulus could be around the corner and as such further easing was already priced into the single currency before the CPI data was released.
US Dollar
‘Cable’ surged through resistance barriers yesterday to register a 150-pip appreciation against the US Dollar. The Pound was heavily supported following the latest British labour market figures, which beat market expectations and led to a shift in BoE rate hike expectations. Sterling was also supported by rumours of a massive $245 billion deal that could see Belgian drinks giant AB Inbev takeover UK company SAB Miller.
Yesterday saw US inflation hold steady 0.2%, which did little to alter market expectations ahead of this evening’s long-awaited Federal Reserve interest rate announcement. Following months of speculation the time is finally upon us for the US central bank to decide whether to stick or twist on interest rates. Rate hike bets swelled at the beginning of the summer but have since died down in response to the deflationary slowdown in China and it is now anticipated that the Fed will opt to remain on the sidelines until later on in the year.
If the Fed does leave rates unchanged then the US Dollar will likely depreciate – the extent of which will depend on the accompanying statement. The most likely outcome is that Fed Chairwoman Janet Yellen will leave rates on hold but talk up the chances of a rate hike in December, which could give Sterling the impetus to rally. These rallies could be much smaller if Yellen signals that rates will rise in October as this would still leave the possibility open of two rate increases taking place before the end of the year.
Canadian Dollar
Sterling rallied by around 200 pips against the Canadian Dollar yesterday thanks to outperforming UK labour market data but the Pound gave back some of its gains during the afternoon in response to a spike in crude oil prices.
Crude rallied 6% when US oil inventory data showed that supplies shrunk by -2.1 million barrels last week. Analysts interpreted the result as a sign that expensive oil production methods could be slowing in the face of lower prices.
Australian Dollar
Despite an unexplained massive 5% rally in the Chinese stock market just before close, which sent the risk-sensitive ‘Aussie’ Dollar higher, the Pound managed to register a slender daily gain against the Australian Dollar yesterday on the back of better-than-anticipated UK labour market figures.
New Zealand Dollar
Sterling rallied by over two cents against the New Zealand Dollar during the London session yesterday due to rising UK interest rate hike expectations.
GBP/NZD grew by a further 100 pips during the Australasian session following a slower-than-anticipated 0.4% quarterly rise in ‘Kiwi’ GDP. Analysts had been primed for a higher score of 0.6%.
Data Released Today
09:30 GBP Retail Sales (YoY) (AUG) Medium 3.8%
19:00 USD Federal Open Market Committee Rate Decision (SEP 17) High 0.25%