Sterling
Sterling stabilised somewhat yesterday, following two days of severe losses, but remained close to multi-year lows versus most of the majors.
The National Institute of Economic and Social Research (NIESR) reported that the UK economy expanded 0.6% between April and June. However, the estimate suggests that growth accelerated strongly in April before contracting in June. The NIESR predicted that the contraction in June will likely continue over the next few months as the impact of ‘Brexit’ weighs on economic sentiment and dampens demand.
A separate, equally frustrating report from the Office for National Statistics (ONS) showed that the British industrial sector grew 1.9% in May, which was its largest expansion since 2010. The data had little impact on the Pound, however, because recent surveys suggest output slowed considerably in the build-up to the referendum, and is liable to decelerate further over the next few months.
Euro
Sterling rallied slightly against the single currency yesterday morning as investors locked in profit from the near-three-year low GBP/EUR rates struck on Wednesday. However, demand for the Pound did not last for long and Sterling softened back towards the trough during the afternoon.
The Euro, for its part, was hurt by speculation that the European Central Bank could release further stimulus measures in the foreseeable future to combat the impact of Britain’s imminent exit from the European Union. The ECB minutes, taken from a meeting before the referendum, convey a desire to boost inflation with lower interest rates and additional bond purchases.
The ECB’s dovish approach matches that of the Bank of England, meaning that the Pound may struggle to strengthen against the single currency, despite the likelihood of additional ECB stimulus.
US Dollar
‘Cable’ rallied through significant psychological resistance yesterday but GBP/USD gave back its gains during the afternoon and ended up only slightly higher than the 31-year low it reached on Wednesday.
Interest rate swaps indicate that markets anticipate a 78% chance of a rate cut from the Bank of England next week and an 86% chance of one by the end of August. Traders had initially bet that the BoE would wait until August to cut rates but the unsavoury goings-ons in the commercial property investment sector (over half of which has now been put on ice) have prompted an even more dovish outlook from investors.
The re-positioning of bets means that if the UK central bank does in fact leave rates on hold next week there is potential for a mini relief rally. The effects of this would probably wear off fairly quickly, however, due to the strong potential for looser policy in August.
Later this afternoon the June’s US non-farm payroll report is predicted to print at 180,000. If the score matches analysts’ forecasts then we could easily see the safe haven ‘Greenback’ appreciate. A positive NFP report carries a good chance of pushing the Pound to US Dollar exchange rate to fresh three-decade lows.
Canadian Dollar
The Pound held close to two-year lows against the Canadian Dollar yesterday as the downtrodden UK currency remained mired in uncertainty following the historic vote to leave the EU on June 23.
Later this afternoon Canadian data is projected to show that unemployment rose slightly from 6.9% to 7.0% in June but the report is not likely to have a large impact on GBP/CAD trading patterns.
Australian Dollar
The Pound to Australian Dollar exchange rate ticked ever-so-slightly higher yesterday as the ‘Aussie’ responded badly to an outlook downgrade from Standard & Poor’s. The credit rating agency cut the outlook on Australia’s prized AAA rating from stable to negative and warned of a 33% chance of a ratings downgrade if the government does not improve its balance sheet.
New Zealand Dollar
Sterling depreciated by around 250 pips against the New Zealand Dollar yesterday as Reserve Bank of New Zealand rate expectations shifted to suggest no further rate cuts. RBNZ Deputy Governor Grant Spencer noted: ‘further reductions in the [interest rate] could pose a risk to financial stability’. Demand for the ‘Kiwi’ rocketed following the hawkish remark and GBP/NZD is now around 27 cents weaker than it was before the ‘Brexit’ result.
Data Released
13:30 USD Change in Non-farm Payrolls (JUN) 180k
13:30 USD Unemployment Rate (JUN) 4.80%
13:30 CAD Unemployment Rate (JUN) 7.0%