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Ex BoE policymaker concerned by Fed hike
– Says bank may need to backtrack.
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GBP/EUR volatile in thin trade
– No significant data on tap.
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‘Greenback’ holds strength
– GBP/USD remains below psychological support.
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Commodity currencies rebound
– Canadian CPI disappoints.
Sterling
There were no key UK ecostats for traders to get their teeth into on Friday and as such the Pound’s movements on the currency market were largely driven by technical patterns.
Ex Bank of England policymaker David Blanchflower, who urged the bank to cut rates in the run-up to the recession, says he thinks there is a 50⁄50 chance that the Federal Reserve might need to reverse its recent interest rate hike and push borrowing costs down into negative territory like the European Central Bank has. His concerns relate to the low-inflation environment in the US, suggesting that the man labelled ‘bonkers’ for predicting the 2008 crash is not going to be arguing the case for a rate rise in Britain anytime soon either.
Euro
The Pound to Euro exchange rate rose by around half a cent during the morning on Friday, pushed higher by a decline in EUR/USD, but the single currency recovered to mark a 30-pip gain by the end of the day.
With liquidity at low levels ahead of the Christmas Holidays volatility is accentuated, which essentially means that it currently takes less of a concerted effort to drive the major currency pairs higher or lower. Thin conditions-based volatility is likely to continue this week but there aren’t any major economic releases on the schedule so GBP/EUR should remain within a tight 150-pip range.
US Dollar
Sterling failed to break through psychological resistance against the US Dollar on Friday, in a sign that GBP/USD may continue to trade the wrong side of 1.50 in the wake of the Federal Reserve’s decision to start normalising monetary policy last week.
American data disappointed with Markit’s index of service sector activity slowing unexpectedly from 56.1 to 53.7, disappointing forecasts of 55.9, but this was not enough to drive ‘Cable’ higher. If the Federal Reserve sticks to its latest projections, which suggest that rates will be raised by a further 100 basis points in 2016, then the ‘Greenback’ is liable to retain strength against Sterling. However if economic conditions fail to improve as expected and the Fed is forced to tone down its hiking cycle – markets currently anticipate 50 basis points of tightening in 2016 – then the Pound could rebound back above 1.50.
Canadian Dollar
The Pound to Canadian Dollar exchange rate is currently trading close to the same level that the pair stood at on Friday morning.
The ‘Loonie’ briefly weakened when Canadian consumer price data showed that inflation grew at a slower-than-expected rate in November but the Canadian Dollar quickly clawed back its losses. The headline Canadian CPI rate came in at 1.4%, up from 1.0%, but lower than forecasts of 1.5%. The monthly figure decreased by -0.1%.
Australian Dollar
The Australian Dollar strengthened by around a cent against the Pound on Friday in a reverse of Thursday’s session, which saw the risk-correlated ‘Aussie’ depreciate by around -120 pips.
Investors do not expect the Reserve Bank of Australia to slash rates further in the foreseeable future and subsequently the Australian Dollar is proving rather resilient to the recent shift in monetary policy in the United States.
New Zealand Dollar
Sterling also ceded a cent to the New Zealand Dollar on Friday as the pair continued to yo-yo in the aftermath of the first Fed rate hike in nine years. Some analysts cited the soft US service sector report as motivation for the ‘Kiwi’ Dollar’s rally but it is unlikely that investors would actually alter their future Fed rate hike projections on the basis of one non-manufacturing PMI result, especially so soon after the long-awaited first piece of monetary tightening.
Data Released Today
15:00 EUR Euro-Zone Consumer Confidence (DEC A) -5.9