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BoE decision on tap – No hike expected.
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Eurozone industrial data disappoints –
Barclays calls for further ECB stimulus.
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‘Cable’ rebounds from five-year low –
Fed policymakers talk down four 2016 rate hikes.
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Crude oil at new 12-year low –
Canadian Dollar down -150 pips.
Sterling
At midday the Bank of England will announce whether it plans to stick or twist on interest rates in January. With inflation close to zero per cent and wage growth underwhelming policymakers’ expectations there is very little chance of the BoE raising rates tomorrow. Subsequently the announcement is unlikely to have much of an impact on the Pound.
However, the accompanying minutes report could prove more interesting as it will elucidate the thinking behind the probable decision to hold. If the minutes show that banks officials are becoming more cautious and see more risks to the domestic recovery this could impact Sterling. It is likely that policymakers will vote 8-1 against hiking rates but there is also the risk that recent negative developments could persuade the one hawkish member, Ian McCafferty, to retract his vote for higher rates. This also has the potential to weaken the British currency.
Euro
Sterling improved slightly against the Euro yesterday as markets reacted to soft Eurozone industrial data and fears of global disinflation boosted European Central Bank stimulus bets.
The headline factory output report for the currency bloc showed that output contracted -0.7% month-on-month in November and that production slowed from 2.0% to 1.1% on an annual basis.
The single currency also suffered as Barclay’s cut its 2016 European consumer price index forecast from 0.5% to 0.1% in reaction to headwinds in the global economy. The investment bank noted that further slowdowns in China could weigh on inflationary pressures and therefore prompt the ECB to unleash additional stimulus measures.
US Dollar
The Pound to US Dollar exchange rate rebounded from a five-and-a-half-year low yesterday as investors reacted to dovish remarks from Federal Reserve policymakers.
Fed officials Eric Rosengren stated that volatility in China and the latest oil price plunge had made it more difficult to plan for a further four interest rate hikes in 2016. ‘Further increases in rates are, in my view, likely to be gradual’, he said.
Former US Treasury Secretary Lawrence Summers appeared to agree with Rosengreen, stating: ‘markets agree with me…markets aren’t expecting four hikes’. Indeed, traders are only currently pricing in two rate hikes this year and that explains why Sterling was only able to eke out minimal gains in reaction to the dovish remarks. However, we could see sentiment towards ‘cable’ change if Fed officials continue to talk down further rate hikes. There is even a fear in some quarters that the US central bank may be forced to backtrack and cut rates back down to zero and resume quantitative easing.
Canadian Dollar
The Canadian Dollar depreciated by around 150 pips yesterday afternoon, even as US crude inventory data temporarily quelled fears of a further build up of supplies.
The data showed that inventories rose by 0.2 million barrels last week, which was much less than the median consensus of 2.5 million, however, it still marked the biggest build up of oil at this time of year for around 80 years and that spooked holders of the commodity-sensitive Canadian Dollar.
The ‘Loonie’ had previously suffered losses in response to crude dipping below the $30 a barrel threshold for the first time since 2003.
Australian Dollar
The ‘Aussie’ Dollar appreciated initially yesterday as traders cheered surprisingly strong trade data out of China. Chinese imports sank -4.0% and exports grew +2.4%, smashing expectations of a -4.1% contraction.
However, the Australian Dollar’s gains evaporated during the London session as traders questioned the efficacy of the Chinese data. Analysts noted that false transactions designed to overcome restrictions on transfers of currency outside the currency could have artificially boosted the December export figures.
The Sterling to ‘Aussie’ Dollar exchange rate fluctuated higher by 100 pips during the Australasian session last night, despite Australian unemployment printing unexpectedly low at 5.8% compared to forecasts of 5.9%.
New Zealand Dolla
r
It was a similar story for the New Zealand Dollar versus the Pound yesterday as its Antipodean cousin, the ‘Aussie’. The risk-sensitive ‘Kiwi’ strengthened during the morning on upbeat Chinese data, however, Sterling recovered its losses later on in the day as scepticism took the shine off the Chinese trade report.
And GBP/NZD fluctuated higher by around 200 pips during the Australasian session.
Data Released
09:00 EUR German GDP n.s.a. (YoY) (2015) High 1.7%
12:00 GBP Bank of England Rate Decision (JAN 14) High 0.50%
13:30 USD Fed’s Bullard Speaks to Economic Club of Memphis Medium