Sterling
Profit-taking stances allowed the Pound to garner some momentum yesterday and recover some ground against the Euro and the US Dollar.
Bank of England Governor Mark Carney warned that if Britain were to vote to leave the European Union it could prompt investors to cut their exposure to British assets, which he said could cause problems given the UK’s relatively high current account deficit. The governor described the current low yield on UK Gilts as ‘the kindness of strangers’ but hastened to add that it was not sensible to rely on this ‘kindness’ for too long, especially if business confidence were to be hampered by a potential ‘Brexit’.
Euro
The Pound to Euro exchange rate rallied by over a cent yesterday as investors continued to lock in profit from the recent plunge in GBP/EUR.
European Central Bank President Mario Draghi’s dovish comments last week, which appeared to pave the way for further stimulus measures in March, have also had a negative impact on the single currency. Traders do not currently expect a cut to the benchmark interest rate or an increase to the quantitative easing target but the prevailing attitude suggests that the ECB could reduce its deposit rate by -10 basis points to -0.40% at the next meeting. This may not have a gigantic impact on the Euro but it will probably weaken it to some extent.
Speculation of more decisive action could pressurise the single currency if ECB policymakers opt to fire up the dovish rhetoric.
US Dollar
‘Cable’ appreciated by around 150 pips to strike a 10-day high yesterday as markets shrugged off BoE Governor Mark Carney’s latest dose of cautionary commentary.
A combination of profit-taking stances, as investors bought back into the Pound following a string of seven-year lows, and a reaction to some downbeat US data worked in Sterling’s favour yesterday.
American service sector output was reported to have cooled unexpectedly from 54.3 to 53.7 at the start of the year. The underwhelming PMI print marked the slowest rate of growth in the sector in just over a year as volatility in emerging markets drove down business confidence.
Holders of the US Dollar were also a little bit anxious ahead of this evening’s interest rate decision from the Federal Reserve. The Fed is highly likely to leave rates on hold and traders fear that policymakers may use this opportunity to talk down future rate hike prospects.
Canadian Dollar
Crude oil prices rose back through US$30 a barrel yesterday and this helped lift the commodity-sensitive Canadian Dollar. GBP/CAD weakened by around a cent during the London session on the uptick in oil, however, the outlook for ‘black gold’ remains bleak and the World Bank cut its 2016 forecast from $51 to $37 per barrel.
Australian Dollar
Swings in risk sentiment, mainly related to global oil prices, caused GBP/AUD to fluctuate wildly yesterday. Neither the Pound nor the Australian Dollar received any positive domestic news during the day but demand for the ‘Aussie’ was boosted somewhat by hopes that the Federal Reserve will lower its 2016 interest rate projections later this evening.
However, a surprise uptick in Australian consumer prices during the Australasian session gave rise to a 100 pip swing in the ‘Aussie’ Dollar’s favour. Australian inflation rose from 1.5% to 1.7% thanks to a 0.4% quarterly increase.
New Zealand Dollar
Sterling grew in strength against the New Zealand Dollar yesterday as jittery traders remained nervous ahead of this evening’s interest rate announcement from the Reserve Bank of New Zealand. Analysts do not expect the bank to cut rates again at this juncture but, due to the current volatility in Asian markets, it is a possibility that cannot be ruled out.
Data Released
10:00 EUR Euro-Zone Unemployment Rate (NOV) Medium 10.7%
10:00 EUR Euro-Zone Retail Sales (YoY) (NOV) Medium 2.0%
13:10 CAD Bank of Canada’s Poloz speaks in Ottawa Medium