Headlines
• Pound down on government borrowing figures –
October deficit worst for six years.
• GBP/EUR close to three-month high –
ECB chief talks up further stimulus.
• Sterling slides vs. US Dollar –
Fed rate hike looks likely.
• Commodity bloc rallies against Pound –
Weak borrowing figures weigh.
Sterling
Government borrowing figures released on Friday showed that the UK deficit increased by £8.2 billion last month, marking the worst October since 2009. The disastrous deficit was higher than all the forecasts in a Reuters poll of analysts and subsequently demand for the Pound plunged as traders bet that British Chancellor George Osborne may choose to tighten government spending measures and unleash a raft of tough austerity measures at his autumn budget statement later on in the week.
Sterling slumped versus nearly all of its most-traded currency peers in reaction to the report, which came in £2.2 billion worse than the medium market consensus of £6 billion. The data shows that public sector net borrowing has decreased by -10.9% in the first six months of the 2015⁄2016 financial year but confirms that the deficit is still on track to come in around £10 billion above target over the year.
Euro
The Pound to Euro exchange rate came within two pips of striking a fresh three-month high on Friday in reaction to remarks from European Central Bank President Mario Draghi suggestive of lower interest rates and enhanced quantitative easing in December.
Draghi struck a decidedly dovish tone, invoking memories of his famous 2012 pledge to ‘do whatever it takes’ to save the Euro, with a promise that the ECB ‘will not hesitate’ to expand its stimulus programme in December if deemed necessary. The dovish remarks were interpreted by investors as a sign that the ECB could prolong its €60 billion asset purchasing scheme past the scheduled September 2016 end date and cut the deposit rate, which currently stands at -0.20%, even further into negative territory in December.
However, Sterling was forced to give up most of its gains as investors reacted to October’s worst-than-anticipated UK government borrowing figures.
US Dollar
The Pound to US Dollar exchange rate declined by over a cent on Friday as dreadful public borrowing figures negatively impacted the UK economic outlook. As traders digested the weak budget figures they softened their British growth projections to account for a new wave of harsh austerity measures that Chancellor George Osborne is expected to announce later this week.
The US Dollar, on the other hand, was boosted by another set of hawkish comments from Federal Reserve policymaker William Dudley, who said that it was ‘very logical’ to expect that the Fed’s inflation and employment targets would be reached ‘soon’, which meant that policymakers could begin planning to ‘raise interest rates’.
This afternoon’s US data is likely to keep rate hike bets alive by showing that manufacturing output remained sturdy at 54.0 at the start of November.
Canadian Dollar
Sterling slumped by around half a cent against the Canadian Dollar on Friday as poor budget figures undermined confidence in the UK tender.
However, the Pound’s losses could have been worse had it not been for an alarming -0.5% plunge in Canadian retail sales, which massively undershot analysts’ expectations of +0.2%. A separate report showed that the headline Canadian inflation rate remained at 1.0% in October as expected.
Australian Dollar
Sterling declined by over -250 pips against the Australian Dollar on Friday as soft domestic data weighed on demand for the Pound.
However, the Antipodean currency was buoyed by hopes that the Chinese Communist Party’s Silk Road imitative will unleash up to $3 trillion worth of investment in infrastructure, which could increase Chinese demand for raw materials from Australia.
New Zealand Dollar
Sterling slid by around -150 pips against the New Zealand Dollar on Friday thanks to an unexpectedly large UK deficit. The worst October budget score since 2009 caused investors to apply downward pressure on the Pound and this allowed the ‘Kiwi’ Dollar to mount an impressive rally.
Data Released Today
09:00 EMU EUR Markit Manufacturing PMI (Nov)Preliminar
14:45 US USD Markit Manufacturing PMI (Nov)Preliminar