- UK Q1 GDP confirmed at 0.4% – Annualised figure downgraded slightly.
- GBP/EUR down from multi-month high – Pound relies on anti-‘Brexit’ sentiment.
- ‘Cable’ strikes 3-week high – Fed’s Yellen statement on tap.
- CAD rises with crude – Oil tops $50 a barrel.
Sterling
Following two days of strong gains, Sterling softened slightly against some of the majors yesterday.
It was a mixture of profit-taking stances and slightly worse-than-anticipated growth figures that dethroned the Pound. The latest GDP report confirmed that the UK economy expanded 0.4% in the first quarter. But markets were unimpressed with news that annualised growth was downgraded from 2.1% to 2.0%.
The report detailed that for the first time in three years business investment declined; the -0.5% slump was put down to jitters ahead of next month’s highly anticipated EU referendum. In a further sign that consumer demand is driving the domestic economy forward, the report showed that service sector output increased 0.6% while construction contracted -1.0% and manufacturing declined -0.4%.
Dark mutterings suggest that George Osborne’s promised ‘March of the Makers’ was not a credible economic forecast, but in fact a misquoted line from a 19th century Dickens’ novel.
Euro
The Pound weakened by around half a cent against the Euro yesterday, bouncing lower from Wednesday’s three-and-a-half-month high.
The downgrade to first quarter annualised GDP negatively impacted the Pound to Euro exchange rate yesterday, but Sterling still remains above key psychological resistance at 1.30. And, so long as opinion polls and betting agencies continue to give the ‘Remain’ camp a sizable lead, Sterling should maintain its current strength against the single currency as we approach the referendum.
However, we could see GBP/EUR begin to slide if sentiment shifts back in favour of the ‘Brexit’ campaign.
US Dollar
Sterling struck a fresh three-week high against the US Dollar yesterday but demand for the Pound cooled following the downgraded Q1 GDP figures.
The ‘Greenback’ attracted buyers during the afternoon thanks to a bumper durable goods print. Orders of long-lasting goods jumped 3.4% in April, smashing forecasts of 0.5%, as civilian aircraft orders surged 64.9%. These kind of aircraft orders are typically volatile, and as such the market retained a sober outlook and ‘Greenback’ buying was not overdone.
Looking ahead, this afternoon’s speech from Federal Reserve President Janet Yellen could prompt big moves in GBP/USD. Markets currently price a 34% chance of a June hike and a 54% chance of a July hike. In the past, the US central bank has never raised rates unless markets have priced in at least a 60% chance of a hike going into the month.
If Yellen talks up June or July rate hike prospects then ‘Cable’ could easily give back its recent gains. Conversely, the Pound would be expected to rally if Yellen refuses to stoke Fed hike bets.
Canadian Dollar
Sterling lost around a cent to the Canadian Dollar yesterday as improved crude oil prices bolstered the appeal of the commodity-correlated ‘Loonie’.
Crude prices surpassed the psychologically significant US$50 a barrel mark yesterday for the first time since early November. The landmark figure marks a tremendous turnaround from the 12-year lows of US$27 a barrel that ‘black gold’ struck back in January.
Australian Dollar
Risk sentiment increased slightly yesterday thanks to the long awaited return to oil prices north of US$50 a barrel. This rise in investors’ appetite for risk allowed the high-beta Australian Dollar to appreciate by around a cent against the Pound. However, GBP/AUD remains six cents higher than it was just eight days ago due to reduced ‘Brexit’ bets from investors.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate struck a fresh three-month high yesterday but demand for Sterling dropped off following the UK GDP report, which pointed to an unbalanced economy. Traders were especially discouraged by the first fall in business investment for three years. If investment fails to rebound following an expected vote to stay in the EU, then it could prove disastrous to UK GDP prospects and, subsequently, demand for the Pound.
Data Released
13:30 USD Gross Domestic Product (Annualized) (1Q S) 0.9%
USD Core Personal Consumption Expenditure (QoQ) (1Q S) 2.1%
15:00 USD U. of Michigan Confidence (MAY F) 95.5
15:30 USD Fed’s Yellen to Speak at Harvard’s Radcliffe Day