Sterling
It was announced yesterday that British manufacturing activity expanded 0.7% in the month of February, smashing forecasts of 0.2%. The robust print impressed analysts who had bet on a soft figure due to the global malaise in financial markets. Slowing Chinese growth, downgraded UK GDP forecasts, turmoil in the domestic steel industry and ‘Brexit’ fears are some of the things UK manufacturers were up against but managed to overcome last month. On an annual basis the sector improved from -1.7% to -0.1%, beating forecasts of -0.7%.
However, sentiment towards Sterling took a bit of a hit during the afternoon when the National Institute of Economic and Social Research (NIESR) calculated that British economic output slowed from 0.4% to 0.3% over the last three months.
Traders also had to get to grips with some controversy regarding none other than Her Majesty The Queen. After Bank of England Governor Mark Carney was accused of taking sides on the EU referendum yesterday investors were shocked to see a spurious headline in The Sun newspaper claiming that Queen Elizabeth was in favour of taking Britain out of the European Union. Officials responded by stating that ‘The Queen remains politically neutral, as she has for 63 years’. Talk about sitting on the fence.
Euro
The Pound to Euro exchange rate remained flat on the day yesterday as traders paused for breath ahead of this afternoon’s key policy announcement from the European Central Bank.
The single currency weakened last week as investors began hedging against new stimulus measures. However, the Euro has strengthened slightly since then due to jittery traders closing positions early to prevent losses if the ECB does not deliver substantial new stimulus.
ECB President Mario Draghi has a tough task on his hands; he wants to bring down the single currency, boost consumer prices and drive economic growth. However, he is unlikely to push the Euro lower unless he increases the €60 billion a month asset purchasing target. If the Euro doesn’t weaken it will be harder for inflation to rise and growth to accelerate.
Most analysts expect Draghi to announce a further cut to the deposit rate, bringing it down from -0.30% to -0.40% and a liberalisation of the bond-buying scheme. This is priced into the market and subsequently would likely be seen as a positive signal for the Euro. To see the single currency depreciate heavily we will probably have to see a deposit rate of -0.50% and a monthly QE target of €70 billion.
US Dollar
‘Cable’ climbed to a quarter cent daily gain yesterday as a shock rise in the British monthly manufacturing output index bolstered the appeal of the UK currency.
Over in the States data also impressed as the wholesale inventories reading came in at 0.3% compared to calls for a -0.2% contraction. GBP/USD fluctuated throughout the day but ultimately it was Sterling that managed to assert itself above a key line of support.
Canadian Dollar
Sterling depreciated by around two cents against the Canadian Dollar yesterday in response to the Bank of Canada’s decision to leave interest rates on hold at 0.50% without making any new comments on the possibility of future cuts. BOC Governor Stephen Poloz said the outlook for monetary policy will not change until after the federal budget is released at the end of the month. This puts added emphasis on April’s interest rate announcement but gives the ‘Loonie’ a little bit of breathing space until then.
Australian Dollar
The Pound to Australian Dollar exchange rate shrank by around -150 pips yesterday to reach its lowest level in almost a year. However, Sterling recovered slightly during the evening as investors reacted to a -9% drop in iron ore prices, Australia’s main export.
New Zealand Dollar
Sterling jumped higher by over four cents against the New Zealand Dollar last night as markets raced to adjust their positions following a surprise rate cut from the Reserve Bank of New Zealand. The RBNZ reduced the benchmark rate from 2.50% to a record low of 2.25% and signalled that further rate cuts were possible over the next few months. The announcement caught traders off-guard, following comments from RBNZ officials last time out suggesting that rates would remain on hold for the time being.
Data Released
12:45 EUR European Central Bank Rate Decision (MAR 10) High 0.05%
EUR ECB Deposit Facility Rate (MAR 10) High -0.40%
13:30 ECB Press Conference High
13:30 USD Initial Jobless Claims (MAR 5) Medium 275k