Sterling
Sterling recovered a little bit yesterday following a day of heavy losses on Tuesday when Bank of England Governor Mark Carney admitted he had no plans to raise interest rates anytime soon.
British unemployment dipped unexpectedly to a near-nine-year low of 5.1% thanks to a better-than-anticipated 267,000 rise in job creation. However, the sturdy figures were undercut by data showing that wage growth slowed from 2.4% to 1.9%, which corroborated Carney’s dovish remarks on Tuesday. With little sign of wages accelerating to levels needed to significantly alter the rate of inflation, there is a fear that the soft inflationary outlook for both wages and prices could become a self-fulfilling prophecy and subsequently there is little hope for a near term BoE rate hike at this time.
Euro
The Pound rose through psychological resistance yesterday to recover from a one-year low against the Euro.
The upbeat headline unemployment numbers gave Sterling a bit of a boost in the morning but GBP/EUR remains five cents down in January due to a shift in BoE rate hike expectations.
This afternoon’s European Central Bank policy announcement could give the Pound a lift if it features dovish commentary from central bank chief Mario Draghi. The recent unwinding of risk assets, which has seen funds flood back into the single currency, could prompt Draghi to talk up the prospect of further easing because a weaker Euro exchange rate is seen as an implicit goal of ECB policy. The theory is that a softer currency will help boost exports and drive inflation back towards the 2.0% target.
The ECB is likely to leave the benchmark rate on hold at 0.05% and the deposit rate on hold at -0.30% but any talk of future action has the potential to put pressure on the Euro.
US Dollar
The Pound to US Dollar exchange rate touched a fresh seven-year low yesterday but Sterling managed to stage a recovery of sorts in the afternoon in response to a softer-than-expected set of US CPI figures.
Compared to calls for a jump in inflation to 0.8%, traders were disappointed by a print of 0.7%, which came as monthly consumer prices shrunk -0.1%.
Having hinted at raising rates just twice in 2016, down on previous projections indicating that there would be a further four hikes, the Federal Reserve may consider holding back on additional tightening if the poor start to the year on financial markets continues. Steep declines in equity markets so far in 2016 mean that January could go down as the worst month in history, and some analysts think this could impact the Fed’s ability to continue its recently commenced hiking cycle.
Canadian Dollar
Sterling appreciated by around half a cent against the Canadian Dollar during the London session yesterday as crude oil prices sunk to their lowest level in 13 years after the world’s energy watchdog warned that the oil market could ‘drown in oversupply’ this year.
The downbeat oil figures outweighed the positive outcome of the Bank of Canada’s latest policy decision. The BoC announced yesterday that it was leaving rates on hold at 0.50% with Governor Stephen Poloz confident that federal infrastructure spending and a global economic recovery would boost the domestic economy over the next 12 months.
Australian Dollar
The Pound to Australian Dollar exchange rate increased by around a cent during the day yesterday as plunging oil prices exacerbated a market wide theme of risk aversion. Falling commodities and a savage start to the year on stock markets mean that jittery traders are reluctant to invest in volatile asset classes and because of this the Australian Dollar has struggled against Sterling so far in 2016 and subsequently GBP/AUD is around four cents stronger than it was on January 1st.
New Zealand Dollar
Sterling remained fairly flat against the New Zealand Dollar yesterday as a fresh wave of risk aversion failed to weaken the ‘Kiwi’ following a sharp depreciation on Tuesday evening due to softer-than-anticipated New Zealand inflation data. Consumer prices were reported to have decelerated from 0.4% to 0.1% in the fourth quarter.
Data Released
12:45 EUR European Central Bank Rate Decision (JAN 21) High 0.05%
12:45 EUR ECB Deposit Facility Rate (JAN 21) High -0.30%
13:30 USD Initial Jobless Claims (JAN 16) Medium 280k
15:00 EUR Euro-Zone Consumer Confidence (JAN A) Medium -5.7