Sterling
The Bank of England reiterated that the upcoming EU referendum was the ‘most significant near-term domestic risk’ to the UK economy yesterday. The bank’s financial policy committee said that a vote to leave the European Union could lead to a Sterling crisis and possibly another credit crunch because the uncertainty would drive up borrowing and risk insurance costs across a wide range of UK assets. The BoE also mentioned that the UK’s mammoth current account deficit could balloon out of control if investors start shunning British assets.
However, the gloomy message was similar to previous communiqués from the central bank and subsequently had only a limited impact on the Sterling exchange rate.
Euro
Sterling ticked higher by around 20 pips yesterday against the Euro as GBP/EUR continued to bounce from last week’s 16-month low.
The day’s only real piece of important news related to Europe or the UK was the Bank of England’s downbeat financial policy report on the threat of instability following a British exit from the European Union, however, the Pound to Euro exchange rate was not affected by the BoE statement.
This afternoon’s German consumer price index report is tipped to show that inflation jumped 0.6% over the month of March, bringing the headline annualised figure up from zero to 0.1%. This slight uptick will obviously be welcomed by policymakers but with price pressures still so low despite the European Central Bank’s extensive easing measures, traders will struggle to make the case for sending the single currency significantly higher. The threat of further ECB stimulus still remains.
US Dollar
Sterling shot up by over a cent against the US Dollar yesterday afternoon when Federal Reserve Chairwoman Janet Yellen noted it was important not to raise interest rates too quickly. Yellen’s dovish message was basically that it’s better to be safe than sorry. She said that if rates rose quickly and the economy faltered it would be difficult to stimulate demand and prevent another credit crunch. She argued that if rates ticked higher gradually and economic growth powered ahead the central bank could easily tighten policy quickly to stabilise the economy.
Yellen also went on to discuss the negative implications of China’s slowing economy and the potential consequences of the crisis in commodity prices. The ‘Greenback’ tumbled due to aggressive selling pressure following the statement as markets pushed back their rate expectations to suggest that the next hike will take place in September, as opposed to June previously. Traders were also spooked by remarks on the possibility of another round of quantitative easing.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by around a third of a cent yesterday as crude oil prices slumped -3% on fears that meetings between the world’s top oil producing nations would not yield a positive outcome. Oil is Canada’s most lucrative export and as such the ‘Loonie’ often rises and falls in tandem with the black commodity.
Australian Dollar
Sterling gave away gains of around 140 pips against the Australian Dollar yesterday afternoon when Janet Yellen’s dovish Fed rhetoric hit the newswires and bolstered investors’ appetite for risk. Despite Yellen’s warning on the perils of the slowdown in China, the ‘Aussie’ strengthened following the statement because it was seen to usher in a slightly longer period of low US interest rates – and low interest rates make it easier for traders to invest in riskier asset classes such as the high-yielding Australian Dollar.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate weakened by around two cents yesterday as dovish rhetoric from the Federal Reserve reduced flights to safety and increased demand for the high-beta ‘Kiwi’ Dollar.
Data Released
13:00 EUR German Consumer Price Index (MoM) (MAR P) Medium 0.6%
13:00 EUR German Consumer Price Index (YoY) (MAR P) High 0.1%