Headlines
•UK retail sales inch higher in August –
Q3 GDP could slow to 0.4%-0.5%.
•GBP/EUR down -60 pips
– But further ECB easing could weigh.
•FED LEAVES RATES ON HOLD –
Pound hits 20-day high vs. US Dollar.
•‘Loonie’ softens following decision –
Canadian CPI on tap this afternoon.
Sterling
It was reported yesterday that British retail sales volumes increased at an annualised rate of 3.7% last month, which, although the smallest increment since September last year, did little to impact demand for the Pound. On a monthly basis retail sales rose by 0.2%, as expected, as purchases of new school uniforms made up for a dip in food sales.
Analysts commented that, taken alongside the recent deceleration of private sector PMI scores, the subdued retail figures were suggestive of third quarter growth of around 0.4%-0.5% – significantly lower than the 0.7% GDP score registered in the second quarter. This was not deemed a sufficient growth score to prompt an earlier-than-expected rate hike from the Bank of England.
Euro
The Pound sunk by over half a cent against the Euro last night in a direct response to an announcement in the United States. The Federal Reserve opted to leave rates on hold during September, which gave the single currency a massive boost against the flailing Dollar and subsequently led to an appreciation of the single currency against most other major currencies due to cross trade flows. EUR/USD is the most traded currency pair in the world and as such significant fluctuations in the pair often lead to reciprocal strong moves in other Euro pairs.
However, it is possible that the Euro’s gains won’t last for long because analysts predict that the European Central Bank may well opt to loosen policy further in response to the Fed’s decision with the express purpose of weakening the Euro exchange rate to help boost competitiveness. The ECB had already stated that it was considering further monetary stimulus and this latest development could well accelerate that process.
US Dollar
The Pound to US Dollar exchange rate soared to a 20-day high yesterday evening, rallying by just under a cent in reaction to the Federal Reserve’s decision to leave interest rates at rock-bottom levels during September.
The majority of market players had anticipated that the US central bank would remain on the sidelines in September but there was a sizable contingent of hawks who had hoped for a token rate rise to signal that the period of ultra-loose monetary policy was coming to an end.
But it wasn’t just the interest rate announcement that softened demand for the ‘Greenback’, it was the dovish rhetoric present in Fed Chairwoman Janet Yellen’s accompanying statement. As anticipated Yellen cited ‘heightened uncertainty abroad’ – a huge nod in China’s direction – but she also revealed that only 13 out of 17 rate setters expect rates to rise before the end of the year, down from 15 at the last meeting in June. This caused traders to reduce their rate hike bets and markets now only anticipate a 47% chance that the Fed will begin its hiking cycle in 2015, down from 64% before the statement.
Canadian Dollar
The Canadian Dollar followed its North American counterpart, the US Dollar, lower to strike a 20-day low against Sterling yesterday. The Pound managed to register an 80 pip gain against the ‘Loonie’ following the announcement even though the risk-sensitive Canadian currency stands to gain against the US Dollar on the back of the decision to leave policy loose for longer.
This afternoon traders will be treated to the latest Canadian consumer price data, which is tipped to show that the headline inflation rate remained at 1.3% during August but that core price pressures decelerated from 2.4% to 2.1%. If it emerges that the headline CPI dropped below 1.3% then it is entirely possible that we could see further gains for Sterling against the ‘Loonie’.
Australian Dollar
The Pound to Australian Dollar exchange rate appeared to ride the ‘Big Dipper’ yesterday following the Fed’s long-awaited interest rate decision. GBP/AUD dipped a stomach churning -250 pips in the immediate aftermath of the rate announcement and dovish statement but traders grew jittery and Sterling managed to recover all of its losses within an hour. All in all the Pound was 150 pips higher by the end of the New York session.
New Zealand Dollar
Apparently the New Zealand Dollar also received a ticket to ride the ‘Big Dipper’ around the time of the Fed policy statement, with GBP/NZD dipping -300 pips before climbing back up again within a couple of hours. It seems that the Fed’s cautionary remarks regarding the turmoil in global financial markets struck a nerve with Antipodean investors with large exposure to emerging markets.
Data Released Today
13:30 CAD Consumer Price Index (YoY) (AUG) High 1.3%
15:00 USD Leading Indicators (AUG) Medium 0.2%