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CBI says wage increase could damage economy
– Retail sales volumes disappoint.
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Spanish newcomers outperform in election
– Political instability could weigh on Euro.
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US GDP revision on tap
– GBP/USD remains below psychological support.
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Crude sinks to 11-year low
– Canadian Dollar weakens.
Sterling
Sentiment towards Sterling weakened yesterday as markets reacted to a statement from the Confederation of British Industry (CBI) warning that government intervention in the labour market could hurt the nation’s jobs prospects. The CBI argued that planned rises to the minimum wage, as well as a levy on apprenticeships, could hamper business investment and weigh on productivity. The industry board also released a survey showing that the number of employers looking to take on more staff in the next year dropped from around 40% in 2014 and 2015 to 30% as we transition into 2016.
Additionally, sentiment was impacted by a retail sales report, also compiled by the CBI, which came in lower than analysts had hoped for. The dataset showed that retail sales volumes rose from +7 to +19 in December, but missed the median market consensus of +21.
Euro
The Pound to Euro exchange rate slid to a two-month low yesterday afternoon as the single currency shrugged off the uncertain results of the general election in Spain.
Strong showings from newcomers Podemos (20%) and Ciudadanos (14%) at the polls prevented current Prime Minister Mariano Rajoy’s People’s Party (28%) from retaining a majority, setting up an unprecedented few weeks of negotations as the traditional parties race to form a working coalition government with the outsiders.
Some analysts warn that the rise of anti-austerity party Podemos could put Spain on a collision course with the rest of Europe in a similar fashion to the events that took place in Greece during the first half of the year. However, the negative market reaction has thus far been limited to Spanish stocks and in particular banking shares, which could be effected by regulatory changes.
There is scope for the single currency to weaken if investors begin to fear that political instability in the currency bloc’s fourth largest economy could threaten its position within the 19-nation bloc but it would take an escalation of events to reach Greek levels of panic.
US Dollar
In a choppy day of trade the Pound to US Dollar exchange rate remained within a tight 50-pip range yesterday.
The CBI’s warning that forcibly higher wages could impact business’ ability to invest and increase productivity damaged sentiment towards Sterling but the impact on GBP/USD was minimal.
Data this morning is forecast to see British government borrowing rise from £7.5 billion to £11.5 billion, which is unlikely to boost appetite for the Pound. But, with US third quarter GDP likely to be revised down from 2.1% to 1.9%, the ‘Greenback’ may struggle to register any meaningful gains.
Canadian Dollar
Sterling rallied by around a third of a cent against the Canadian Dollar yesterday as traders dumped the commodity-sensitive ‘Loonie’ in response to the latest plunge in crude oil prices, which saw ‘black gold’ sink to a new 11-year low on concerns of global demand massively undershooting swelling supplies.
With oil-producing nations such as Libya and Iran likely to increase production in 2016, and the Saudi-led OPEC showing no signs of intervening in the market, oil is on course for its largest monthly percentage decline in seven years.
Australian Dollar
The Pound to Australian Dollar exchange rate weakened slightly yesterday on the CBI labour market warning. GBP/AUD could soften further when this morning’s UK public sector borrowing figures are released if they show that the government borrowed £11.1 billion to balance the books in November, as anticipated.
New Zealand Dollar
Sterling depreciated by around -150 pips to strike a six-month low against the New Zealand Dollar yesterday as investors continued to trim their Reserve Bank of New Zealand rate cut projections, which drove the high-beta ‘Kiwi’ higher.
Data Released Today
09:30 GBP Public Sector Net Borrowing (Pounds) (NOV) 11.1b
13:30 USD Gross Domestic Product (Annualized) (3Q T) 1.9%
13:30 USD Core Personal Consumption Expenditure (QoQ) (3Q T) 1.3%