Sterling
Despite a downbeat set of factory output numbers, the Pound managed to avoid any steep losses versus the majors yesterday.
The Office for National Statistics announced that industrial output declined -1.1% in December, which was the sharpest monthly drop since 2012. On a yearly basis the industrial sector contracted -0.4%, which weighed on the Pound because it was much lower than the median market forecast of a 1.0% expansion. The unusually warm weather in December was seen to have driven down demand for electricity and gas, while manufacturers saw output decline -1.7% on a yearly basis as export orders softened.
The latest dataset further highlights the extent to which the British economy relies on domestic demand and some analysts are now expecting the fourth quarter growth print of 0.5% to be revised lower in response to the poor industrial sector numbers.
Euro
The Pound to Euro exchange rate recovered yesterday as investors sought to lock in profit from the 13-month low that GBP/EUR struck on Tuesday.
The disappointing UK factory numbers could have plunged the Pound to fresh yearly lows but investors decided the latest leg of Sterling’s depreciation had been slightly overdone.
In Europe, banking stocks continued to plummet and the continent’s largest lenders are now down -25%, or -$240 billion, since the start of the year. Analysts warn that the recent sell off in banking stocks is more savage than the brutal declines preceding the financial crisis in 2008. This is also a factor that could be playing on investors’ minds when considering whether or not to invest in the currency bloc.
US Dollar
Sterling rallied initially against the US Dollar yesterday as traders geared up for Federal Reserve President Janet Yellen’s latest monetary policy statement. However, GBP/USD gave back its 100 pip daily gains following Yellen’s speech, which was seen to leave the door open to further rises in US interest rates.
The Fed President noted that financial conditions had tightened at the beginning of 2016, with specific reference to the volatility in China, but Yellen noted that encouraging labour market improvements and decent domestic growth would likely continue through the rest of the year. Yellen concluded that the current outlook was consistent with a ‘gradual’ rise in in US rates in the medium term.
The statement was considered slightly more optimistic than most traders had expected and subsequently demand for the ‘Greenback’ improved in reaction to the announcement.
Canadian Dollar
The Pound rallied by over a cent against the Canadian Dollar yesterday as fears of future US interest rate hikes increased following Fed President Janet Yellen’s speech. The risk-sensitive ‘Loonie’ is susceptible to shifts in global economic sentiment and for this reason investors decided to sell the North America currency as they updated their forecasts for tighter US policy.
Australian Dollar
The risk-correlated Australian Dollar failed to post any lasting gains versus the Pound yesterday because negative UK sentiment was overshadowed by Federal Reserve President Janet Yellen’s decision to leave the door open to new rate rises this year.
Yellen talked down the possibility of reducing rates and indicated that policymakers were comfortable with the recent performance and near term outlook of the US economy. Holders of the ‘Aussie’ had hoped for a dovish statement from the Fed but Yellen’s optimism weighed on demand for the Antipodean currency.
New Zealand Dollar
The New Zealand Dollar suffered a drop off in demand yesterday afternoon as sentiment towards perceived riskier currencies was hit by the Federal Reserve’s relatively upbeat economic assessment. The ‘Kiwi’ joined the ‘Aussie’ and the ‘Loonie’ in depreciating following Yellen’s policy statement.
Data Released
13:30 USD Initial Jobless Claims Medium 280k
15:00 USD Fed’s Yellen to Appear Before Senate Banking Committee Medium