Sterling
‘Brexit’ concerns dominated the morning discussions at the World Economic Forum in Davos yesterday, with leading Dutch, German and French political figures urging Britain to remain part of the European Union. The UK Prime Minister responded to criticism of the proposed referendum, which many business leaders think will cause unnecessary uncertainty, by stating that he was a ‘democrat’ who wanted to ‘confront this issue’ once and for all. Cameron added that he was ‘not in a hurry’ to accept a new EU deal and was happy to wait for a good package.
The additional referendum coverage appeared to weigh on the Pound as investors feared that prolonged negotiations could cloud British business in uncertainty for longer-than-anticipated.
Euro
The Pound to Euro exchange rate rallied by around 150 pips yesterday afternoon in reaction to dovish comments from European Central Bank Chief Mario Draghi.
The ECB voted to leave rates on hold in January but Draghi hinted that policymakers could opt to provide additional stimulus next time out. Draghi mentioned that increased downside risks such as ‘heightened uncertainty about emerging market prospects, commodity markets and geopolitical risks’ combined with weaker-than-expected Eurozone inflation prospects meant it was ‘necessary to review and reconsider [the bank’s] monetary policy stance in early March.’
Although Draghi mentioned that the interest rate was unlikely to be changed in March the dovish remarks led to the prevailing view that the deposit rate would be cut from -0.30% to -0.40% at the next meeting and this drove the Euro lower versus Sterling.
US Dollar
‘Cable’ slid to a fresh seven-year low yesterday as enhanced ‘Brexit’ speculation decreased the appeal of the Pound. GBP/USD initially depreciated -80 pips but the latest plunge set off a barrage of buy orders and Sterling managed to claw back its losses as investors locked in profit from the latest dip.
US data showed that jobless claims rose 10,000 to 293,000 last month and that the Philadelphia manufacturing index contracted -3.5. The largely inconsequential figures did not exert much pressure on the ‘Greenback’.
Canadian Dollar
The Pound plummeted by a whopping three cents against the Canadian Dollar in its worst day of trading since August as oil prices rebounded from 13-year lows. The ‘Loonie’ was also boosted by the prospect of further ECB easing and by yesterday’s statement from the Bank of Canada, which appeared to rule out the threat of any near term Canadian rate cuts.
GBP/CAD struck a monthly low ahead of data this afternoon that is expected to show a jump from 1.4% to 1.7% in Canadian consumer prices.
Australian Dollar
Sterling fell by around a cent to a fortnightly low against the Australian Dollar yesterday as risk aversion trends cooled in reaction to a 3% rally in oil prices and hopes that additional stimulus from the ECB would boost markets. The Pound, on the other hand, was hurt by fears of a long drawn out EU referendum process.
Later today we could see Sterling recover if retail sales print strongly for December. On a yearly basis the consumer spending figures are expected to show 3.5% expansion.
New Zealand Dollar
GBP/NZD weakened by around a cent yesterday as uncertainty surrounding Britain’s EU status weighed on Sterling and a pause in global risk aversion benefitted the risk-sensitive ‘Kiwi’ Dollar.
Data Released
09:00 EUR Markit Eurozone Composite PMI (JAN P) Medium 54.1
09:30 GBP Retail Sales (YoY) (DEC) Medium 3.5%
09:30 GBP Public Sector Net Borrowing (Pounds) (DEC) Medium 10.0b
13:30 CAD Retail Sales (MoM) (NOV) Medium 0.3%
13:30 CAD Consumer Price Index (YoY) (DEC) High 1.7%
14:45 USD Markit US Manufacturing PMI (JAN P) Medium 51.