Headlines
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UK inflation rises into positive territory
– UK CPI prints at 0.1%.
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GBP/EUR flat
– UK labour data on tap.
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‘Cable’ sinks -100 pips
– Fed set for lift-off after strong US CPI.
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Canadian Dollar rebounds
– ‘Kiwi’ higher on dairy auction.
Sterling
The Pound weakened yesterday as markets reacted to a slightly slower-than-anticipated rise in British wages. The Office for National Statistics (ONS) announced that pay growth slowed from 3.0% to 2.4% in October, which disappointed expectations of 2.5% and validated the Bank of England’s decision to leave interest rates on hold at the current record low of 0.50% last week. Policymakers cited soft wage growth as one of the barriers standing between Britain and a rate hike and subsequently demand for Sterling softened following the result.
The headline unemployment rate slid to a near-10-year low of 5.2% but the encouraging figure was not enough to lift BoE rate projections.
Euro
The Pound rallied minimally against the Euro yesterday despite data showing that Eurozone inflation rose faster-than-expected in November. Eurostat reported that consumer prices accelerated from 0.1% to 0.2% last month but investors remained wary of recent drops in commodity prices, which could easily drag the inflation index lower again in December. The single currency was also mildly impacted by a slender slowdown in Eurozone private sector output, from 54.2 to 54.0.
During the evening an increase of 2016 Federal Reserve rate hike bets also drove down demand for the Euro.
US Dollar
So the wait is finally over. After nine long years the Federal Reserve finally announced another rise in US interest rates. Fed President Janet Yellen announced last night that interest rates would rise from 0.25% to 0.50% in a signal that the world’s largest economy has finally risen from the doldrums of the worst financial crisis since the Great Depression.
The rate hike was largely telegraphed by financial markets so in itself was merely a stabiliser for the US Dollar. However, traders were cheered by Yellen’s policy statement, which saw the central banker predict that ‘economic activity will continue at a moderate pace and labour market indicators will continue to strengthen’ in the New Year.
The Fed’s median projected interest rate target for 2016 remained at 1.375%, implying that we could see four further 25 basis point rate hikes over the next 12 months. This exceeded market expectations and gave the ‘Greenback’ a boost, which drove GBP/USD below key psychological support.
Canadian Dollar
Although the Pound rallied by around a cent against the Canadian Dollar yesterday afternoon, Sterling was unable to maintain its gains through the evening. The Fed’s decision to raise rates and leave the door open to around four further increases in 2016 could have damaged the risk-sensitive ‘Loonie’ but on this occasion that was no the case.
Australian Dollar
Sterling softened by around a cent against the Australian Dollar yesterday as traders breathed a sigh of relief that the current downturn in commodity markets and emerging market economies was not considered drastic enough to prevent the Federal Reserve from tightening monetary policy for the first time since 2006.
Under these circumstances of extreme expectations of a hike, had the US central bank shied away from action the ‘Aussie’ could have depreciated on risk aversion trends.
New Zealand Dollar
The New Zealand Dollar also rallied by around a cent against Sterling yesterday as the on-point Fed rate hike and strong domestic growth bolstered the appeal of the ‘Kiwi’.
Data showed that economic growth jumped from 0.3% to 0.9% in the third quarter, beating expectations of 0.8%, as sturdy manufacturing and retail scores made up for a shortfall in milk production.
Data Released Today
09:00 EUR German IFO – Business Climate (DEC) 109
09:30 GBP Retail Sales (YoY) (NOV) 2.3%