Sterling
Sterling tumbled against all of its major currency peers yesterday as exacerbated market wide routs led investors to push their Bank of England rate hike bets well into the future and begin to consider the possibility of interest rates being reduced at some point this year.
Markets now expect the BoE to avoid hiking rates until 2020 and estimate that there is an almost 50⁄50 chance of policymakers voting to cut rates before the year is out. Renewed pressure on stock markets saw the FTSE 100 plunge -2.4% and this helped persuade investors to send their funds on flights to safety. Of the traditional safe havens the Swiss Franc, the Japanese Yen and the Euro – all of which are currencies from economies with trade surpluses – performed much better than the US Dollar and Pound Sterling – which both have huge account deficits to contend with.
Euro
The Pound to Euro exchange rate plunged by around a cents yesterday to strike a new 15-month low as investors all but ruled out the possibility of a near-term UK interest rate hike.
Indeed, negative BoE policy bets drove Britain’s borrowing costs to their lowest level on record yesterday: interest rates on the 10 year Gilt touched 1.3%, which is less than at any point going back through the historical record books into the 1600s.
Data on schedule for release today is tipped to confirm that Eurozone GDP expanded 0.3% in the fourth quarter of 2015 and that UK construction output grew 0.8% last December. However, the data prints are unlikely to have much of an impact on GBP/EUR because traders’ minds are firmly focussed on the deteriorating outlook for UK interest rates.
US Dollar
‘Cable’ weakened by around -70 pips yesterday as investors gave their damning verdict on the prospects of British interest rates rising in the next four years.
During the afternoon Federal Reserve President Janet Yellen struck a dovish tone, warning that she could not rule out the possibility of interest rates being cut this year or of the US economy falling back into recession. Fed rate bets now suggest there is only a 2% chance of another interest rate hike by September of this year, which is down massively on the 87% chance priced-in on January 1st.
The ‘Greenback’ is struggling but the Pound is suffering from an even more extreme loss of confidence.
Canadian Dollar
Sterling depreciated by around -70 pips yesterday as downbeat UK rate speculation weighed on the Pound.
The Canadian Dollar got caught in the cross fire of negative oil price movements during the evening, when the value of crude dropped below US$26.19 a barrel for the first time since 2003. However, demand for the commodity-sensitive ‘Loonie’ improved later in the New York session in reaction to news that the United Arab Emirates’ energy minister Suhail bin Mohammed al-Mazrouei had expressed ‘optimism’ that a deal between OPEC members to curb production and drive prices higher would be reached later in the year.
Australian Dollar
The Pound to Australian Dollar exchange rate initially rallied by around two cents yesterday as sell offs in global stocks weighed on investors’ appetite for perceived riskier assets such as the ‘Aussie’. However, Sterling was forced to give back its gains and more when traders begun pushing back their BoE rate hike bets into the next decade.
New Zealand Dollar
The Pound’s horrendous day on the currency markets continued against the New Zealand Dollar yesterday, with Sterling even managing to succumb to a half-cent daily depreciation against the high-beta, high-risk ‘Kiwi’.
Data Released
09:30 GBP Construction Output s.a. (YoY) (DEC) Medium 0.8%
10:00 EUR Euro-Zone Gross Domestic Product s.a. (QoQ) (4Q A) Medium 0.3%
10:00 EUR Euro-Zone Gross Domestic Product s.a. (YoY) (4Q A) High 1.5%
13:30 USD Advance Retail Sales High 0.1%
15:00 USD U. of Michigan Confidence High 93