Sterling
Despite data showing that UK inflation is currently running at its highest rate for a year the Pound found itself on a downward path versus most of the majors yesterday.
The Office for National Statistics reported that British consumer prices accelerated from 0.2% to 0.3% in January as the impact of falling fuel prices receded slightly. Although fuel prices fell in January this year, they fell at a slower rate than in January of last year thus boosting the headline CPI figure.
Sentiment towards Sterling was hurt by the monthly CPI index, which shrunk -0.8%, and by comments from European Parliament President Martin Schulz reminding that any deal agreed by UK Prime Minister David Cameron to keep Britain in the European Union would have to pass a vote in Brussels – something which Schulz warned he could not guarantee.
Euro
The Pound to Euro exchange rate slumped by a cent yesterday as technical trading patterns overshadowed the fundamentals.
Looking at the data – a one-year high UK CPI print and a sharp slide in German investor confidence from 22.7 to 13.6 – you’d be forgiven for expecting GBP/EUR to strengthen yesterday. However, it seems investors were more interested in technical trade setups than the data releases yesterday. Having depreciated by almost 15 cents since the start of December, GBP/EUR is on a steep downward path and the current trend line suggests that Sterling is likely to weaken by a further three cents in the near future.
‘Brexit’ fears and far-out Bank of England rate hike bets mean that Sterling may struggle to recover versus the single currency even if the European Central Bank unleashes another wave of significant stimulus in March.
US Dollar
Intense volatility saw ‘Cable’ rally by around 70 pips yesterday morning before sliding by around -220 pips to mark a sharp daily decline of -150 pips and a new fortnightly low.
UK inflation rose from 0.2% to 0.3% in January, it was reported yesterday, but Sterling traders were unimpressed by the report because BoE interest rate hike projections have recently been shifted significantly further into the future. The CPI improvement also underwhelmed GBP/USD traders because US inflation is tipped to accelerate from 0.7% to 1.3% on Friday.
Yesterday’s sharp ‘Cable’ losses marked the end of a fortnight of tight trading conditions. Analysts are now expecting the Pound to US Dollar exchange rate to decline further over the next few days and weeks.
Canadian Dollar
Sterling weakened by around a cent yesterday to strike a fresh four-month low as market sentiment towards the Pound collapsed.
Markets were sensitive to a deal announced yesterday between OPEC members, who, along with Russia, vowed to freeze oil production at the current levels. However, traders were largely unimpressed with the deal because oil production levels are already running above supply and the deal will only come into effect if all members agree to it – something which is almost certainly not going to happen because Iran has repeatedly stated that it is aiming to increase production this year now that Western sanctions have been lifted.
Crude oil prices failed to strengthen following the announcement but GBP/CAD still plummeted as investors continued to pull out of investments denominated in Sterling ahead of the proposed in/out EU referendum.
Australian Dollar
The Pound tumbled to a fortnightly low against the Australian Dollar yesterday, however, Sterling recovered most of its losses during the afternoon.
The ‘Aussie’ benefitted from the latest minutes report from the Reserve Bank of Australia showing that policymakers were not keen to cut rates further at this juncture despite the recent turmoil in financial markets. The Antipodean currency had also gained ground on news of better-than-anticipated Chinese credit data and a rise in iron ore prices.
New Zealand Dollar
Sterling strengthened by around two cents to a February high against the ‘Kiwi’ Dollar yesterday as New Zealand two-year inflation expectations fell from 1.85% to 1.63% and the nation’s dairy farmers saw pay outs decline -2.8%. Global dairy prices have now fallen over -55% since the start of 2014 and GBP/NZD has risen by around 20 cents in that time.
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