Sterling
Sterling performed quite well yesterday despite further warnings that a ‘Brexit’ could lead to dire consequences for the UK economy. Bank of England Deputy Governor Andrew Bailey argued that the city of London could lose its status as an international financial hub if companies emigrate to European cities following a vote to leave the EU. On the other side of the debate, pro-‘Brexit’ campaigner Boris Johnson said that the EU was following the path of Adolf Hitler and Napoleon by trying to create a European superstate.
Analysts only give a 30% chance of Britons voting to leave the EU next month and it seems this is helping prevent any extended volatility in the Pound’s exchange rate at this juncture.
The key event to look out for today is the UK CPI report, which is tipped to show that inflation remained at 0.5% in April.
Euro
The Pound to Euro exchange rate ticked higher by around a third of a cent yesterday ahead of this morning’s UK CPI report.
If the British inflation score prints inline with economists’ forecasts of 0.5% then Sterling could appreciate because Eurozone CPI is currently running much lower at -0.2%. A recent rise in crude oil prices means that global inflationary pressures could begin to rise later this year, thus bringing back the prospect of tighter monetary policy in the UK.
Providing the UK votes to remain in the EU and inflationary pressures do in fact start to build, then it is entirely possible that we could see Sterling rally versus the Euro in the second half of the year. The European Central Bank looks likely to pursue extremely loose monetary policy well into 2017 and therefore the single currency could struggle if BoE rate hike bets re-emerge.
US Dollar
‘Cable’ strengthened by around half a cent yesterday but we could see GBP/USD fall back down this afternoon if US inflation data outpaces UK CPI.
American data impressed at the end of last week’s session and this afternoon’s print is expected to show a rise in consumer prices from 0.9% to 1.1%. Although the Federal Reserve is unlikely to raise rates ahead of the ‘Brexit’ referendum, bets of stronger rates could begin to send the ‘Greenback’ higher over the summer.
Also on the agenda tomorrow are reports anticipated to show that industrial and manufacturing production increased 0.3% last month. However, optimism could be tempered if real average weekly earnings continue to rise by just 1.1%.
Canadian Dollar
Sterling tumbled by around a quarter of a cent against the Canadian Dollar yesterday, as crude oil prices accelerated 2.5% to a 2016 high due to supply outages and a positive market forecast from Goldman Sachs
After months of glut the energy sector is finally seeing demand outpace supply, prompting Goldman Sachs to upwardly revise its forecasts for the commodity.
Record low oil prices have seriously weakened the Venezuelan economy, leading to power shortages, which in turn have led to sharp reductions in crude production. In Nigeria, oil output has tumbled to decade lows due to multiple acts of sabotage in the oil fields. Meanwhile, in Canada production declined by -1 million barrels per day due to the Alberta wildfire.
Australian Dollar
The Pound to Australian Dollar exchange rate weakened yesterday morning as rising oil prices boosted global risk sentiment. However, the ‘Aussie’ gave back its gains during the evening as traders geared up for the Reserve Bank of Australia’s latest minutes report. The RBA cut rates at its most recent meeting and employed dovish rhetoric.
New Zealand Dollar
GBP/NZD remained fairly flat yesterday as improving risk sentiment was tempered by concerns surrounding the Reserve Bank of New Zealand’s rate outlook. Traders were worried that soft inflation expectations combined with declining milk prices could persuade the RBNZ to follow the RBA’s lead and loosen policy over the next few months.
Data Released
09:30 GBP Consumer Price Index (YoY) (APR) High 0.5%
13:00 NZD Dairy Auction Whole Milk Powder MT (MAY 17) High $2,176
13:30 USD Consumer Price Index (YoY) (APR) High 1.1%
13:30 USD Real Avg Weekly Earnings (YoY) (APR) Medium 1.1%
14:15 USD Manufacturing (SIC) Production (APR) Medium 0.3%