• Premature New Year’s hangover weakens Sterling – Pound down before New Year’s Day.
• UK manufacturing on tap – German inflation to impress.
• ‘Cable’ falls to new eight-month low – US manufacturing set to remain in contraction.
• Risk currencies rally then fall versus Pound – AUD & NZD hit six-month highs.
Sterling
The Pound appeared to suffer a premature New Year’s hangover at the end of last week’s session, with Sterling sliding versus most of its major currency peers during the afternoon on New Year’s Eve.
Although cheap petrol at the pumps and supermarket price wars should ensure that consumer spending drives the British economy forward at a decent pace in the first half of 2016, the lack of any real inflationary pressure or upward momentum in earnings suggests that the Bank of England may be wise to hold off on raising interest rates for the time being.
Even if Britain does expand rapidly in the first six months of the year there is the very real threat of Prime Minister David Cameron holding his in/out EU referendum in the second half of the year. At best the vote will unsettle financial markets and see business investment cool; at worst the referendum could see growth grind to a halt as certain big businesses prepare to move operations out of Britain. And, with a recent poll suggesting that 47% of 200,000 respondents want to leave the European Union compared to only 38% who were in favour of staying and 15% who were undecided, the increasing threat of a ‘Brexit’ is also persuading analysts to cut their exposure to the UK tender.
Euro
The Pound to Euro exchange rate remained close to a two-month low on New Year’s Eve as traders continued to fret over the possibility of anti-European sentiment in Britain taking a potential in/out EU referendum to the wire later on in the year.
Data due for release later today is expected to show that British manufacturing output improved marginally, from 52.7 to 53.0, in December but the Pound could struggle to rally versus the single currency if German inflation points to a 0.6% rise in price pressures as anticipated.
US Dollar
The Pound slumped by a further -80 pips on New Year’s Eve to strike a fresh eight-month low against the US Dollar.
American sentiment was helped over the weekend by news that the Federal Reserve’s recent rate hike has been effective in driving interest rates higher during the second half of December, which was seen as positive for holders of the ‘Greenback’ who will benefit from higher yield returns on Dollar-denominated investments.
However, we could see Sterling benefit from profit-taking later this afternoon – especially if US manufacturing output remains in contractionary territory. Investors are primed for a score of 49.0, below the 50.0 mark that separates growth from contraction.
Canadian Dollar
Sterling plunged -170 pips against the Canadian Dollar at the end of last week’s session to reach a three-week low point despite the value of its most lucrative export, crude oil, holding close to its lowest level in over a decade. Fears of a crude supply glut worsening in 2016, as OPEC drops an output limit, a 40-year US export ban is lifted and Iran returns to full output, drove oil to 11-year lows in the final weeks of 2015 and therefore it is difficult to see the ‘Loonie’ strengthening significantly over the next few weeks.
GBP/CAD rallied by around 70 pips when markets opened for the first time in 2016.
Australian Dollar
The Pound to Australian Dollar exchange rate weakened by over a cent on New Year’s Eve to strike a new half-year low as investors bet that the Reserve Bank of Australia would not cut rates in the first half of the year. After months, years even, of verbal jawboning, RBA Governor Glenn Stevens recently noted that the exchange rate has been ‘doing its job’ by weakening over the past year. This less aggressive stance towards the domestic currency was seen as a sign that the Governor is happy with the current level of the ‘Aussie’.
However, Sterling shot up the currency ladder against the ‘Aussie’ when markets reopened for the year, appreciating by around 180 pips.
New Zealand Dollar
The New Zealand Dollar followed the crowd and appreciated against the Pound on New Year’s Eve before giving back its gains earlier this morning.
GBP/NZD shrunk by around half a cent and fell to a new six-month low last Thursday as ‘Brexit’ fears and soft BoE rate hike bets weighed on Sterling but the ‘Kiwi’ lost out on around two cents during the Asian session.
Data Released
09:30 GBP Markit UK PMI Manufacturing s.a. (DEC) 53
13:00 EUR German Consumer Price Index (YoY) (DEC P) 0.6%
15:00 USD ISM Manufacturing (DEC) 49