Headlines
• BoE’s Broadbent speaks on rates –
Boosts Q2 2016 hike bets.
• GBP/EUR close to three-month high –
Stimulus more likely following Paris attacks.
• Sterling up slightly vs. US Dollar –
Fed minutes signal December rate hike.
• Markets cheered by hawkish Fed –
Seen as positive global growth indicator.
Sterling
The Pound rose in demand against most of the majors yesterday morning as comments from Bank of England Deputy Governor Ben Broadbent appeared to suggest that UK interest rates would rise earlier than markets currently forecast.
Broadbent said that investors were ‘focussing too obsessively’ on the BoE’s two-year inflation forecasts and reminded that these projections are based on lots of things and do not necessarily reflect, exactly, the views of policymakers at the bank. Currently, markets expect rates to rise in the first quarter of 2017 but economists anticipate a rate hike in the second quarter of 2016. Bullish analysts interpreted Broadbent’s statement as a tacit endorsement of economists’ Q2 2016 rate hike forecasts and this led to a slight uptick in demand for Sterling.
The Pound also benefitted from an annual earnings report from the Office for National Statistics indicating that British wages, adjusted for inflation, rose 1.9% in April 2015, marking the first year of real wage growth since 2008.
Euro
The Pound to Euro exchange rate remained close to its highest level for three months yesterday as markets reacted to further terrorist related incidents in France.
Demand for the single currency remained weak as investors bet that the impact of the latest spate of terrorist attacks would persuade policymakers at the European Central Bank to loosen monetary policy further in the near future. ECB President Mario Draghi had already explicitly hinted at further stimulus prior to the Paris attacks, due to soft Eurozone GDP growth and negligible inflation prospects, and policymakers’ remarks in the aftermath of last Friday’s tragic events only seem to support the argument for further accommodative policy.
US Dollar
Sterling rallied by around half a cent against the US Dollar yesterday morning in reaction to BoE Deputy Governor Ben Broadbent’s latest remarks on monetary policy. His plea for investors to take the bank’s two-year inflation projections less literally was seen as a hawkish statement but overall markets decided that there was not enough concrete evidence of a sooner-than-anticipated rate hike and GBP/USD gave back most of its gains by midday.
During the evening the Federal Reserve released the minutes from its most recent meeting, which showed that ‘most’ of the rate-setting team expected conditions for a rate hike to be ‘met’ by December. The hawkish remarks augur well for the US Dollar going forward but the market reaction was fairly muted on this occasion because a December hike is already 70% priced into the ‘Greenback’.
Canadian Dollar
The Pound gained around half a cent against the Canadian Dollar during the day yesterday as traders continued to sell the risk-correlated ‘Loonie’ on concerns that weak oil prices will impact domestic growth in Canada. A report released yesterday afternoon showed that Saudi Arabia increased its oil exports by 113,000 barrels a day to 7.11 million barrels and this pushed crude prices lower and subsequently softened demand for the ‘Loonie’.
However, GBP/CAD cooled off in the evening as markets rallied on the hawkish Fed minutes report, which was seen as a positive signal for the global economy.
Australian Dollar
Sterling rallied by around a cent against the Australian Dollar yesterday as global risk sentiment waned following another day of grim terrorist related news in France. Additionally, Australian economic sentiment was damaged by comments from Chinese President Xi Jinping suggesting that the world’s second-largest economy faces ‘considerable downward pressure’ over the next few months.
However, the Pound’s gains were mostly erased following the positive Fed minutes report because the hawkish statement removed a degree of uncertainty regarding the timing of the first rate rise in nine years.
New Zealand Dollar
For the third day in a row the Pound to New Zealand Dollar exchange rate rose to a new 40-day high yesterday as the risk-sensitive ‘Kiwi’ struggled to garner support amid an environment of risk aversion. But GBP/NZD softened during the evening as markets rallied on the prospect of a normalisation of Fed monetary policy.
Data Released Today
09:30 GBP Retail Sales (YoY) (OCT) Medium 3.9%
12:30 EUR ECB account of the monetary policy meeting Medium
13:30 USD Initial Jobless Claims (NOV 14) Medium 270k