Headlines
•
UK inflation rises into positive territory
– UK CPI prints at 0.1%.
•
GBP/EUR flat
– UK labour data on tap.
•
‘Cable’ sinks -100 pips
Canadian Dollar rebounds
– ‘Kiwi’ higher on dairy auction.
Sterling
Sterling traders breathed a sigh of relief yesterday as UK consumer price inflation printed above zero after two months of negative price pressures.
The Office for National Statistics (ONS) said that smaller declines in transport costs, such as air fares and petrol prices, compared to November 2014, drove CPI higher from -0.1% to +0.1%. However, inflationary pressures remained subdued due to the largest drop in clothing prices since records began in 1996. With oil prices plunging to near-11-year lows earlier in the week, it is highly likely that December’s figure, released next month, could dip back into negative territory.
So although yesterday’s CPI score was a symbolic victory for the Pound, the fundamentals suggest that it could be a little while before headline inflation returns to the Bank of England’s 2.0% target.
Euro
Sterling traded in a relatively subdued fashion against the Euro yesterday. GBP/EUR rallied by around 70 pips during the afternoon but the pair had consolidated its gains by the end of the London session, just a few hours later.
German ZEW data showed that investor confidence in the Eurozone’s largest economy is running strong, at a better-than-anticipated 33.9, despite the recent ‘Made in Germany’ brand damaging Volkswagen emissions scandal. Today’s European data is forecast to show that private sector output in the currency bloc remained sturdy at the beginning of December but markets will probably give more of their attention to the UK labour market report.
British unemployment is tipped to remain at a seven-year low of 5.3% but wage growth is predicted to slow from 3.0% to 2.5%, which is especially important considering BoE policymakers have recently spoken of the perils of raising rates while wages are not growing rapidly.
US Dollar
The Pound to US Dollar exchange rate plummeted -100 pips yesterday afternoon as investors reacted to a decent US inflation print, which further cemented expectations that the Federal Reserve will hike interest rates later this evening.
US CPI rose from 0.2% to 0.5%, with core consumer prices inching higher from 1.9% to 2.0%. Yesterday’s data was seen as the last potential pitfall for a December rate hike but it would have taken a disastrously low score to change the market outlook at this stage and 0.5% certainly was not that.
Enhanced volatility is expected in the run-up to this evening’s policy decision from the Federal Reserve and in the aftermath. The prevailing consensus is that the Fed will raise rates 25 basis points to 0.50%, which should bolster the appeal of the ‘Greenback’ but because the move has been priced into the US Dollar for so long Fed President Janet Yellen’s post-decision press conference is arguably more important than the actual decision.
If Yellen paves the way for a run of rate hikes in 2016 then the US Dollar is likely to soar and GBP/USD could drop below psychological support. But if the Fed Chairwoman talks down the prospect of additional rate rises then the Pound could actually rally against the US Dollar.
Canadian Dollar
Sterling declined by around -150 pips versus the Canadian Dollar yesterday as GBP/CAD got caught in the crossfire of GBP/USD. In other words, Sterling’s heavy losses against the ‘Greenback’ ahead of this evening’s predicted Fed rate hike weighed on the Pound and pushed it lower against the ‘Loonie’.
The Canadian currency was also boosted by a bounce back in oil prices, following Monday’s drastic near-11-year lows.
Australian Dollar
The ‘Aussie’ initially rallied yesterday morning following comments from the Reserve Bank of Australia, which appeared to suggest that interest rates would stay flat for the foreseeable future.
But Sterling appreciated mildly against the Australian Dollar during the afternoon ahead of the Fed’s rate decision, which could impair sentiment towards risk-correlated currencies like the ‘Aussie’.
New Zealand Dollar
Sterling weakened by around half a cent against the New Zealand Dollar yesterday as markets responded positively to a 1.9% rise in dairy prices at the latest auction. The rise in value of New Zealand’s largest export supported the commodity-sensitive ‘Kiwi’ Dollar ahead of this evening’s third quarter GDP report, which is expected to show an acceleration of economic growth form 0.4% to 0.8%.
However, be warned that the New Zealand Dollar could weaken significantly if the Fed strikes a hawkish tone.
Data Released Today
09:00 EUR Markit Eurozone Composite PMI (DEC P) 54.2
09:30 GBP ILO Unemployment Rate (3M) (OCT) 5.3%
09:30 GBP Average Weekly Earnings (3M/YoY) (OCT) 2.5%
10:00 EUR Euro-Zone Consumer Price Index (YoY) (NOV F) 0.1%
14:15 USD Industrial Production (NOV) -0.1%
19:00 USD Federal Open Market Committee Rate Decision (DEC 16) 0.50%
19:30 USD Fed Chair Yellen Holds Press Conference
21:45 NZD Gross Domestic Product (QoQ) (3Q) 0.8%