Headlines
• Sterling volatility bets rise –
On EU referendum jitters.
• GBP/EUR close to three-month high –
ECB’s Draghi talks up stimulus prospects.
• ‘Cable’ trades sideways –
US retail sales & consumer confidence data on tap.
• Sterling appreciates vs. Canadian Dollar –
Crude oil slides on soft China data.
Sterling
The Pound softened versus some of the majors yesterday afternoon as speculative investors hedged against large fluctuations in the Sterling exchange rate. The price of protecting against Sterling / Euro price swings rose 10% to a three-year high and the price to hedge against volatility in Pound / US Dollar jumped 9.5% to a seven-month high. Fears regarding a potential in/out EU referendum were cited by traders as reason for the uptick in volatility. Prime Minister David Cameron has promised a referendum by the end of 2017 but many analysts expect the vote to take place midway through 2016. Markets are unimpressed by the idea of a referendum because of the uncertainty it will cause.
Euro
The Pound to Euro exchange rate came within five pips of striking a fresh three-month high yesterday morning but Sterling was unable to hold onto its gains through the afternoon as EU referendum worries weighed.
The single currency tanked in the morning when European Central Bank President Mario Draghi gave further hints that he was prepared to increase the bank’s stimulus programme in December. Draghi noted that signs of improvement in consumer prices have ‘somewhat weakened’, confirmed that the €60 billion a month asset purchasing scheme would ‘run beyond September 2016’ if CPI did not return to target and mentioned that ‘other instruments could also be activated’ to help drive price pressures back in the right direction.
Some traders had hoped that the Federal Reserve’s expected December rate hike could persuade ECB officials to wait on the sidelines until the New Year but Draghi’s dovish comments yesterday did not fit that argument.
Although the Euro exchange rate was barely impacted, it is worth noting that chaos returned to the streets of Athens yesterday as a government-encouraged strike against the government’s austerity measures escalated into a battle between an isolated group of protestors with petrol bombs and Molotov cocktails and police with tear gas.
This morning’s GDP report is tipped to see Eurozone growth remain at 0.4% in the third quarter. Any downgrades could weigh on the Euro whereas any upgrades could bolster demand.
US Dollar
The Pound remained relatively flat against the US Dollar yesterday as a Federal Reserve President mentioned that policymakers need to be careful when deciding on monetary policy but gave no indication as to whether the world’s most powerful central bank would hike in December.
Fed policymaker Charles Evans said that it could be ‘well into next year’ before US inflation prospects justify a rate rise but the Chicago Fed President is a notorious dove and as such his remarks did not hold massive sway over currency markets. A 70% majority of investors still expect the Fed to vote to raise rates next month.
This afternoon’s US data set is tipped to see retail sales accelerate from 0.1% to 0.3% and consumer confidence rise form 90 to 91.5. The positive prints are likely to support demand for the ‘Greenback’.
Canadian Dollar
Sterling rallied by around 70 pips to strike a fresh fortnightly high against the Canadian Dollar yesterday as oil prices tanked again. The value of a barrel of crude declined -1.5% as investors eyed further problems in China, where data this week related to trade, industrial production and bank lending has disappointed.
The ‘Loonie’ remained relatively insensitive to a domestic housing report showing that new house prices increased by 1.3% in September, as expected.
Australian Dollar
The Pound to Australian Dollar exchange rate weakened by around -150 pips yesterday as an early morning Australian labour market report boosted the appeal of the Antipodean currency. Data showed that, contrary to expectations of 6.2%, the unemployment rate dipped to an 18-month low of 5.9% thanks to a superb 58,600 rise in job creation. The robust labour figures were seen to reduce the prospect of a near-term interest rate cut and this allowed the high-beta ‘Aussie’ Dollar to appreciate across the board.
New Zealand Dollar
Sterling strengthened by around 80 pips against the New Zealand Dollar yesterday as risk aversion gripped markets in the face of a potential rate hike in the United States – the world’s largest economy –next month and the possibility of more economic turmoil in China – the world’s second largest economy.
Data Released Today
10:00 EUR Euro-Zone Gross Domestic Product s.a. (QoQ) (3Q A) Medium 0.4%
10:00 EUR Euro-Zone Gross Domestic Product s.a. (YoY) (3Q A) High 1.7%
13:30 USD Advance Retail Sales (OCT) High 0.3%
15:00 USD U. of Michigan Confidence (NOV P) High 91.5