Sterling
The Pound got off to a bright start yesterday morning when the Office for National Statistics reported that UK inflation inched higher from 0.1% to 0.2% in December but demand for Sterling collapsed at midday when Bank of England Governor Mark Carney warned that the UK faces ‘a powerful set of forces’ preventing policymakers from hiking interest rates.
In a gloomy assessment of the current economic climate, Carney cited the renewed collapse in oil prices, volatility in China and subdued domestic wage growth as reasons to hold off on raising rates. The dovish statement took on added significance because just six months ago the Governor mentioned that the decision on when to raise rates would come into sharper relief around the turn of the year. In Carney’s own words: ‘the year has turned and the decision proved straightforward: now is not yet the time to raise rates’.
Investors pushed back their rate expectations and some analysts even quipped that Carney could return to Canada in 2018 after serving his five-year term without ever raising interest rates.
Euro
Sterling stooped to a fresh one-year low against the Euro yesterday afternoon as downbeat remarks from BoE Governor Mark Carney, six months after hinting at an early-2016 rate hike, pushed market expectations well into the future.
The Pound to Euro exchange rate declined by around a cent yesterday despite core UK inflation rising unexpectedly from 1.2% to 1.4%. Data published yesterday showed that Eurozone consumer prices rose 0.2% and the German ZEW investor sentiment index cooled from 16.1 to 10.2 but these data prints had little impact on GBP/EUR.
Today’s most important British releases are tipped to show that UK unemployment remained at a seven-year low of 5.2% in November and 235,000 new British jobs were created. However, a predicted slowdown in wage growth from 2.4% to 2.1% is likely to take the shine off the labour market report and subsequently demand for Sterling is not expected to increase materially.
US Dollar
The Pound to US Dollar exchange rate skidded to a new seven-year low yesterday afternoon as traders around the world sold Sterling on the back of Governor Carney’s dovish assessment of the UK rate outlook.
Carney said that ‘monetary policy will continue to depend on economic prospects and not the calendar’, which markets took as a signal that the bank does not currently have a proposed date for lift off on rates. ‘Cable’ plunged lower by around a cent in response to the statement and GBP/USD is now down six cents so far in 2016, and almost twice that much over the last month.
Later this afternoon US data is anticipated to show that consumer prices jumped from 0.5% to 0.8% in December, which could put further pressure on GBP/USD.
Canadian Dollar
Sterling softened by around a cent against the Canadian Dollar yesterday as a combination of dovish BoE rate hike bets and a rebound in crude oil prices put pressure on GBP/CAD.
Crude oil recovered 3% yesterday on reports that Chinese demand likely hit an all-time high in 2015, rising 2.5% on 2014 despite fears that cooling economic growth would curb demand. However, a report form the International Energy Agency suggesting that the global glut was likely to last throughout 2016 – partly due to unseasonably warm weather – prevented crude from settling above $30 a barrel.
Australian Dollar
The Pound shed over -250 pips against the Australian Dollar yesterday as bets of a 2016 UK interest rate hike were seriously dented by a dovish statement from Governor Mark Carney.
The risk-sensitive ‘Aussie’ had initially declined on soft Chinese GDP data, which showed that the Chinese Dragon slowed to a 25-year low of 6.9% in 2015.
New Zealand Dollar
Sterling lost -250 pips to the New Zealand Dollar yesterday as investors took the ‘Kiwi’ higher as BoE rate hike bets deteriorated. But GBP/NZD recovered during the evening when New Zealand inflation underwhelmed at 0.1% compared to forecasts of 0.3% due to a surprisingly steep -0.5% quarterly contraction in consumer prices.
Data Released
09:30 GBP ILO Unemployment Rate (3M) (NOV) 5.2%
09:30 GBP Employment Change (3M/3M) (NOV) 235k
09:30 GBP Average Weekly Earnings (3M/YoY) (NOV) 2.1%
13:30 USD Consumer Price Index (YoY) (DEC) 0.8%
15:00 CAD Bank of Canada Rate Decision (JAN 20) 0.50%