Sterling
Sterling appreciated versus some of the majors yesterday as investors reacted to an unexpectedly strong service sector report.
Markit Economics reported that activity within the dominant service sector improved from 55.5 to 55.6 in January, beating estimates of a slight slowdown to 55.4. Analysts said the improved figure pointed towards an acceleration of economic growth from 0.5% to 0.6% at the beginning of the year. However, Britain’s reliance on domestic demand is liable to limit the nation’s ability to advance sustainably in the long term and optimism was tempered by a warning from Chris Williamson, chief economist at Markit, suggesting that ‘cracks continue to appear in the country’s resilience to various headwinds’ from abroad.
Today’s session sees the Bank of England press ahead with another of its ‘Super Thursday’ triple-whammy announcements. The bank is extremely unlikely to alter its 0.50% interest rate or its £375 billion asset purchasing scheme but there is hope among traders that the bank will strike an upbeat tone in its inflation report. We could see the Pound sustain its recent gains and possibly push further ahead if Governor Mark Carney keeps hopes alive of a rise in borrowing costs before the year is out.
Euro
The Pound to Euro exchange rate leapt to a weekly high in the morning yesterday but GBP/EUR dropped back down during the afternoon.
The only significant data print out of the Eurozone showed that retail sales increased by 1.4% in December, which was minimally lower than the median forecast of 1.5%. Because the actual result was only slightly lower-than-anticipated the single currency was not subject to any additional selling pressure following the reading.
The direction of the Sterling to Euro exchange rate during today’s session will largely depend on BoE Governor Mark Carney’s tone during his inflation report.
US Dollar
The Pound powered ahead to a robust set of daily gains – in the region of 150 pips – against the US Dollar yesterday in reaction to the morning’s upbeat British service sector PMI numbers.
‘Cable’ touched a three-week high following a steady appreciation throughout the London session, which was helped by a disappointing US service sector score. The ISM non-manufacturing index confounded expectations of 55.8 with a near-two-year low print of 53.5 due to the worst business activity score since August 2012.
If Sterling manages to retain yesterday’s gains following the midday ‘Super Thursday’ announcement from the BoE, then it could trigger a larger rebound higher over the coming weeks. But then again: a sturdy US non-farm payroll print on Friday could help bring March Fed rate hike expectations back into focus and this could derail Sterling’s nascent revival.
Canadian Dollar
The Pound tumbled by around -250 pips against the Canadian Dollar yesterday as commodity markets rallied in reaction to hopes that OPEC may hold an emergency meeting this month.
Although the outcome of the potential negotiations may be difficult to predict, oil traders were cheered by remarks from the Ecuadorian President suggesting that a meeting was on the cards in February. Analysts are betting that if OPEC members do meet it could lead to a new production limit that would potentially push oil prices higher and increase demand for the commodity-sensitive ‘Loonie’.
Australian Dollar
Sterling rallied by around a cent against the Australian Dollar yesterday but the Pound was unable to hold onto its gains because risk sentiment was given another shot in the arm by the Bank of Japan.
The BoJ shocked markets last week by cutting one of its deposit rates into negative territory and Governor Haruhiko Kuroda boosted appetite for riskier assets further yesterday by claiming that policymakers were prepared to expand stimulus further and push rates even lower to help boost the nation’s flailing inflation prospects. The extremely dovish remarks bolstered the appeal of the risk-sensitive ‘Aussie’.
New Zealand Dollar
GBP/NZD plummeted by over -200 pips yesterday as sentiment towards the New Zealand Dollar was boosted by the BoJ’s latest batch of dovish rhetoric. The ‘Kiwi’ also garnered support following Tuesday’s strong labour market improvement, which saw unemployment plunge from 6.0% all the way down to 5.3%.
Data Released
12:00 GBP Bank of England Rate Decision (FEB 4) High 0.50%
12:00 GBP BOE Asset Purchase Target (FEB) High 375b
12:00 GBP Bank of England Inflation Report High
15:00 USD Factory Orders (DEC) Medium -2.8%