Headlines
• UK Gov borrowing data on tap –
Lending set to hit £8.8bn
• GBP/EUR hits monthly high –
On ECB easing bets.
• ‘Cable’ struggles after technical rejection –
Potential for Sterling to strengthen.
• Pound up vs. Antipodeans –
Global growth concerns impact risk sentiment.
Sterling
Sterling traded with little fresh directional bias yesterday as markets continued to digest the major events that took place last week – most notably the outperforming UK labour market figures, hawkish Mark Carney comments and the Federal Reserve’s decision to leave interest rates on hold during September.
On Monday Bank of England deputy Governor Jon Cunliffe published an article in the British press stating that, contrary to remarks made by fellow BoE policymaker Andy Haldane last week, interest rates are likely to rise gradually over the next 12 months. Cunliffe cautioned that underlying price pressures were much weaker than analysts had hoped for but asserted that ‘pretty good’ economic growth was not being fuelled by unsustainable debt.
Later this morning UK lending data is expected to show that the government was forced to borrow £8.8 billion during August to balance the books. Whilst not particularly good news it is unlikely to harm the Pound because it is about the average amount borrowed each month over the last few years.
Euro
Sterling rose by around 100 pips yesterday to strike a monthly high against the Euro as European Central Bank easing bets continued to weigh over the single currency.
The Euro rallied minimally at the start of the week in reaction to Alexis Tsipras’ comfortable election victory in Greece, which gives Syriza a clear mandate to go ahead and implement a range of crippling economic reforms required to obtain crucial financial aid from the nation’s international creditors. However, this minor wave of optimism quickly dissipated as traders turned their attentions back to the growing consensus of analysts forecasting further stimulus from the ECB. Whether this involves additional rate cuts, an enlarged monthly asset purchasing target, the inclusion of a wider pool of assets in the scheme or a commitment to continue purchasing assets for longer remains to be seen but it is looking more likely than ever that the ECB will act over the next few months and this is hurting demand for the Euro.
US Dollar
It was reported yesterday that US existing home sales dipped -4.8% during August, which undershot the median market consensus of +1.8% but failed to lift Sterling against the US Dollar. It seems that the Pound is struggling following a technical rejection at the end of last week’s session but if British data picks up then there is strong potential for ‘Cable’ to rally against the ‘Greenback’ now that a 2015 rate hike from the Fed is no longer considered a certainty.
Later in the week US durable goods data is tipped to print weakly at -2.3%, which could hurt the Dollar, and second quarter GDP is expected to be confirmed at 3.7% – but again, a weaker print could easily kick off a rally in Sterling’s favour.
Canadian Dollar
Apart from a -90 pip trough in the middle of the day GBP/CAD remained on a relatively smooth course yesterday as markets took a breather following last week’s highly anticipated interest rate announcement from the Federal Reserve.
There is little on the Canadian economic calendar this week but Wednesday sees the release of retail sales data for July, which is tipped to show an acceleration from 0.6% to 0.8% and could support strength in the ‘Loonie’.
Australian Dollar
The Pound to Australian Dollar exchange rate rallied by around 150 pips yesterday as traders overlooked the prolongation of cheap credit from the US and examined the negative sentiment towards Australia and the ‘Aussie’ Dollar. With China heading towards the rocks and demand for commodities waning, the future could be fraught with hazards for the Australian Dollar and it seems that investors are keen to cut exposure to the Antipodean economy in case things continue to deteriorate. It was reported that National Australia Bank chief economist Ivan Colhoun was told that the ‘Australian economy is toast’ whilst on a trip across Europe and the Middle East to gauge market sentiment.
New Zealand Dollar
With the New Zealand Dollar and the Australian Dollar closely linked in traders’ minds – both considered proxies for A) China and B) global risk sentiment – it is not surprising that the ‘Kiwi’ suffered similar losses to its Antipodean cousin yesterday. GBP/NZD appreciated by around 250 pips as markets considered the potential damage that the Chinese slowdown could have on risk sentiment and economies in the Asia Pacific region. Investors were also concerned by the dovish outlook of the Fed, which will keep interest rates low but also suggests that the world’s most powerful central bank is extremely worried about the potential consequences of further volatility.
Data Released Today
09:30 GBP Public Sector Net Borrowing (Pounds) (AUG) Medium 8.8B