Headlines
• BoE raises concerns over wage growth –
Remains unmoved by other central bank actions.
• GBP/EUR up 50 pips –
Analysts hopeful of Q2 2016 BoE rate hike.
• ‘Cable’ flat –
Sterling recovers following BoE announcement.
• ‘Aussie’ up on sturdy labour data –
RBA rate cut bets slashed.
Sterling
Demand for Sterling stalled yesterday in response to the Bank of England’s latest policy statement, which was seen to have a slight dovish bias.
The bank left interest rates on hold at 0.50% and the minutes report revealed that only one policymaker, Ian McCafferty, voted for a rate hike in December. This much was expected. However, holders of the Pound were slightly perturbed by policymakers’ decision to highlight that there was ‘no mechanical link’ between other central bank’s actions and their own, which was seen as a rebuttal of the argument that the BoE would start hiking soon if the Federal Reserve matches market expectations and begins raising rates later this month.
Investors were also alerted by remarks suggesting that policymakers wanted further signs of progress in the labour market before they would consider tightening policy. The statement declared that ‘pay growth [has] flattened off recently’, which analysts said could put enhanced emphasis on upcoming wage growth reports.
Euro
The Pound rallied by around half a cent against the Euro yesterday as markets digested the implications of the BoE’s latest policy statement. Although the UK central bank focussed on issues such as falling oil prices and slowing wage growth, analysts reminded that monetary policy transmission generally takes around two years to work its way through the economy and posited that the impact of falling fuel prices is unlikely to weigh on inflation in 24 months time. This would potentially leave the door open to a BoE rate rise in the second quarter of 2016.
Later today the European Central Bank will announce the allotment of its TLTRO stimulus programme, which could potentially move the market if it features a larger-than-expected total.
US Dollar
Sterling initially weakened by around half a cent against the ‘Greenback’ yesterday when the BoE policy statement hit newswires. However, demand for the Pound rebounded within the hour as some traders continued to bet that UK rates would rise in the first half of next year.
Data yesterday showed that US initial jobless claims rose from 269,000 to 282,000 last week, which had little-to-no effect on the US Dollar. But GBP/USD trading patterns could prove more sensitive to this afternoon’s US retail sales report, which is tipped to show a acceleration from 0.1% to 0.3%. A robust reading should support Fed rate hike bets, while a shocking result could plant the seed of doubt in some investors’ minds.
Canadian Dollar
The Pound to Canadian Dollar exchange rate jumped to a new three-and-a-half-month high yesterday evening as traders reacted to the latest rise in OPEC oil supplies, which pushed crude prices lower and weighed on the commodity-sensitive ‘Loonie’.
Incidentally, the recent weakness in the Canadian Dollar exchange rate has forced ‘Dollarama’, a famous Canadian ‘Dollar store’ to raise its prices to C$1.25 per item. A tangible example of the way exchange rates can impact inflation.
Australian Dollar
Surprisingly strong Australian jobs figures for November bolstered the appeal of the ‘Aussie’ Dollar yesterday morning and subsequently GBP/AUD gave back its 200-pip Wednesday gains. The unexpected dip in unemployment from 5.9% to 5.8% was seen to greatly reduce the probability that the Reserve Bank of Australia will opt to slash rates over the next 12 months.
New Zealand Dollar
The Pound slid lower by around half a cent against the New Zealand Dollar following the BoE’s policy statement yesterday. Sterling recovered its post-BoE losses versus most major currencies yesterday but not against the volatile ‘Kiwi’ Dollar.
Data Released Today
09:30 GBP BoE/GfK Inflation Next 12 Mths (NOV) Medium 2.0%
10:15 EUR ECB Announces Allotment of TLTRO Medium
13:30 USD Advance Retail Sales (NOV) High 0.3%
15:00 USD U. of Michigan Confidence (DEC P) High 92.0