Headlines
• Sterling flat ahead of GDP report –
Q3 growth tipped to print at 0.5%.
• ECB easing bets continue to swell –
Markets prepared for stimulus next week.
• US markets closed for Thanksgiving –
Thin trading conditions lead to enhanced volatility.
• ‘Cable’ up on sturdy growth projections –
But strong US data supports December rate hike.
Sterling
It was a pretty quiet day in financial markets yesterday as the dust settled from British Chancellor George Osborne’s Autumn Statement and US traders focussed on eating Turkey as part of their Thanksgiving celebrations rather than reacting to Turkey (the country) which recently shot down a Russian warplane.
British investors saw no reason to alter their initial reaction (which was to send Sterling slightly higher) to the latest UK budget, which saw Osborne take advantage of a £27 billion windfall from forecasters to ease back on spending cuts. However, we could see a little bit more Sterling volatility this morning if the latest British GDP report deviates from the median market consensus. Analysts anticipate that third quarter growth will come in at 0.5%, marking a 2.3% yearly expansion. Anything lower could hurt the Pound whilst anything higher could give Sterling another boost.
Euro
Speculation increased yesterday that the European Central Bank will act decisively next week in a bid to A) boost liquidity in the bloc, B) drive consumer prices higher and C) weaken the Euro exchange rate.
Markets now expect ECB President Mario Draghi to cut the deposit rate from the current -0.20% to around -0.35%, with the aim of forcing large financial institutions to risk lending to the real economy rather than settle for nominal losses parking their funds at the ECB. There is also intense speculation regarding the bank’s quantitative easing scheme, which many think will be upgraded to include more risky assets, larger monthly purchases or, at the very least, prolonged past the current September 2016 end date.
Enhanced ECB easing bets weighed on demand for the Euro yesterday but the single currency held firm against the Pound because markets have been already been positioning themselves ahead of the December central bank meeting for weeks.
US Dollar
In sparse trading conditions, due to the Thanksgiving Holiday in the US, GBP/USD lost out on around -30 pips yesterday. Thin trading conditions often accentuate minor market moves and it appears possible that yesterday’s fluctuations were a result of this enhanced volatility.
The Federal Reserve is widely expected to raise interest rates next month and therefore the ‘Greenback’ appears to have an advantage over the Pound. However, these rate hike bets are largely priced into the system and historical data shows that the US Dollar is often susceptible to weaken during the first three months of a Fed tightening cycle. This means that if the US central bank does in fact opt to raise borrowing costs next month, but continues to talk down the prospect of multiple further rate hikes in 2016, then we could see a counter-intuitive ‘Cable’ rally.
Of course, it is important to remember that past events and statistical correlations do not necessarily imply causation and therefore it is entirely possible that GBP/USD could depreciate when US rates, and therefore yields, begin to rise.
Canadian Dollar
Sterling slid by around half a cent against the Canadian Dollar yesterday during a quiet day on financial markets. It will be interesting to see how GBP/CAD trades during today’s session because any positive or negative revisions to Britain’s third quarter growth report could easily drive Sterling higher or lower.
Australian Dollar
The Pound to Australian Dollar exchange rate spiked by around a cent yesterday morning in reaction to a dreadful third quarter Australian business investment print of -9%, which massively overshot analysts expectations of a more manageable -3% contraction. The dismal print weighed on the ‘Aussie’ because it was seen to dampen bets that the Reserve Bank of Australia will not be moved to slash interest rates further over the next few months. But Sterling’s gains were cut short before the end of play.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate remained fairly flat yesterday but ultimately Sterling suffered a minor loss of around -20 pips. Today’s session is likely to be dominated by reaction to this morning’s third quarter UK GDP revision.
Data Released Today
10:30 GBP Gross Domestic Product (QoQ) (3Q P) Medium 0.5%
10:30 GBP Gross Domestic Product (YoY) (3Q P) High 2.3%