Sterling
The Pound came under a little pressure against some of the majors yesterday as ‘Brexit’ fears and soft Bank of England rate hike bets continued to weigh on demand for Sterling.
Swiss bank Credit Suisse released a report indicating that if Britons were to vote to leave the European Union later this year it would lead to an ‘immediate and simultaneous economic and financial shock’ for the UK economy. They fear that a ‘Brexit’ could bring about a snap recession, reduce GDP by -2%, hamper business investment, weaken the Pound and weigh on wage growth. The market reaction to the damning report was negative but the Pound was not hit too badly because the idea of a ‘Brexit’ is still situated in the hypothetical category at this stage.
BoE interest rate projections were dealt another blow when policymaker Kristin Forbes stated that the latest drop in global oil prices means the bank does not need to consider raising interest rates at the moment because inflation, at 0.2%, is well below the target of 2.0%.
Euro
Sterling weakened by around half a cent against the Euro yesterday as downbeat UK economic sentiment proved a drag on GBP/EUR.
In Europe it was announced that the IFO index of German business confidence cooled from 108.6 to 107.3 in January but this was not enough to prop-up the Pound as the Confederation of British Industry (CBI) reported a further contraction in retail sales. January’s CBI score sank from -7 to -15.
US Dollar
Sterling shed around a third of a cent against the US Dollar yesterday as fears mounted that soft wage growth, anaemic inflation prospects and an impending EU referendum could delay the first BoE interest rate hike until at least the end of this year.
In the US manufacturing data revealed a sharp dip in factory output in Dallas during December. The Dallas Fed index plunged from -21.6 to a six-year low of -34.6, which added further weight to the argument against raising rates again later this week.
The Federal Reserve rate setting team is due to convene later this week and vote on monetary policy but expectations of another does of tightening are very low. It could be more interesting to hear what policymakers have to say about the current economic climate: if Fed officials choose to alter their projections to signal a slower path of normalisation then the Pound could possibly claw back some of its recent losses against the ‘Greenback’.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by around two cents yesterday as global risk aversion trends weighed on the commodity-correlated ‘Loonie’.
Crude oil prices started on the front foot but demand for ‘black gold’ deteriorated during the day as: Iraq announced production hit a record high last month, Saudi producers stated they had no intention of quelling production, Indonesia hinted that Venezuela was the only OPEC member trying to push the price higher and traders locked in profit following Friday’s sharp 9% crude rally.
Australian Dollar
Following a rare day of risk gains on Friday the Australian Dollar weakened by around a cent against Sterling yesterday as crude oil prices fell -4% and investors went back into risk aversion mode. As a commodity-sensitive currency the ‘Aussie’ is susceptible to swings in economic sentiment and yesterday’s swings worked against the Antipodean currency.
New Zealand Dollar
Sterling rallied by around half a cent against the New Zealand Dollar yesterday as ‘Brexit’ fears impacted the Pound but dovish Reserve Bank of New Zealand speculation weighed harder on the ‘Kiwi’. Some investors are concerned that this week’s RBNZ meeting could see policymakers talk up the possibility of another rate cut due to the recent spate of volatility in financial markets.
Data Released
14:45 USD Markit US Services PMI (JAN P) Medium 53.9
15:00 USD Consumer Confidence (JAN) High 96.5