Headlines
• Pound puts in solid performance on Friday –
UK construction prints at 0.2%.
• GBP/EUR flat –
German inflation hits 0.4%.
• ‘Cable’ rises to three-week high –
Markets tone down additional Fed rate hike bets.
• Sterling hits three-month high vs. ‘Loonie’ –
GBP/CAD close to eight-year high.
Sterling
The Pound rallied against the commodity bloc on Friday as concerns related to activity in China weighed on commodity prices. Sterling also gained ground against the US Dollar but remained flat versus the Euro.
In the UK data showed that construction output rose just 0.2% in October, down from previous forecasts of 1.0%, but the downbeat ecostat had little impact on Sterling because the monthly construction index is often susceptible to large revisions. In a separate report it emerged that British consumers expect the UK inflation rate to hit 2.0% by next December. Whether or not the Bank of England agrees with this view remains to be seen but the Pound would likely strengthen on rate hike bets if CPI did begin rising towards the 2.0% target.
Euro
The Pound to Euro exchange rate remained close to a monthly low on Friday as the German consumer price index printed at 0.4%. Demand for the single currency was bolstered by the figure because investors bet that stronger consumer price inflation in the bloc’s largest economy could help drive up CPI in the Eurozone.
European consumer prices are currently rising at just 0.1% per year, despite the European Central Bank’s decision to push deposit rates into negative territory and embark on a €60 billion per month bond-buying programme, and this is weighing on the Euro. However, we could see the single currency rally if stronger German inflation figures lead to stronger numbers for the currency bloc as a whole.
US Dollar
Sterling jumped higher by around 80 pips on Friday to strike a three-week high in reaction to the latest round of US ecostats, which caused investors to tone down their expectations for additional rate rises next year.
The main driver behind GBP/USD’s rally on Friday was a weaker-than-anticipated retail sales result of 0.2%, which undershot expectations of 0.3% and caused speculative investors to push back their 2016 US rate hike bets. Most analysts expect the Federal Reserve to raise rates later this week but this is already priced-into the ‘Greenback’ so traders have now turned their attentions to how fast the US central bank will raise rates following the anticipated December hike.
However, the US Dollar was also hurt by a stagnation in the business inventories index and a smaller-than-expected rise in consumer confidence from 91.3 to 91.8, which was slightly worse than the median market consensus of 92.0.
Canadian Dollar
The Pound to Canadian Dollar exchange rate leapt higher by around 250 pips on Friday to touch a new three-month high in reaction to another drop in crude oil prices.
GBP/CAD was only 20 pips away from hitting a new eight-year high as the International Energy Agency (IEA) reported that demand for crude was likely to drop from 1.8 million barrels per day to 1.2 million barrels per day in 2016, which drove oil prices down to yet another near-seven-year low and subsequently weakened investors’ appetite for the commodity-sensitive Canadian Dollar.
Australian Dollar
Sterling strengthened by around 250 pips against the Australian Dollar on Friday as risk aversion swept through global markets due to fears that further slowdowns in China could weigh heavily on commodity and equity prices. Australia’s strong trade links with China mean that the Australian economy is liable to suffer more than most if the Chinese dragon does in fact suffer a hard landing in 2016 and subsequently the ‘Aussie’ Dollar was very sensitive to the latest downturn in Chinese commodity demand expectations.
New Zealand Dollar
The commodity-correlated ‘Kiwi’ Dollar also fell out of favour with investors on Friday due to market-wide themes of risk aversion. GBP/NZD increased in value by around 250 pips on Friday and jumped higher by around 40 pips when markets reopened for the week as fears of further drops in the commodity market weighed on the high-beta New Zealand Dollar.
Data Released Today
10:00 EUR Euro-Zone Industrial Production w.d.a. (YoY) (OCT) Medium 1.7%