Sterling
Although there were some British troublemakers in France last month, the grand majority of English, Welsh and Northern Irish fans who travelled to the European Championships did so for all the right reasons. Most probably didn’t expect all three to reach the second round, fewer still would have predicted that England would be knocked out by Iceland and even less would have been thinking about their impact on the UK consumer price index.
However, huge demand for flights to France in June pushed air fares higher, which in turn led to a surprise two percentage point rise in UK CPI. The Office for National Statistics (ONS) reported yesterday that inflation jumped from 0.3% to 0.5% last month, confounding forecasts of 0.4%.
Prior to the ‘Brexit’ vote an uptick in price pressures would almost definitely have boosted demand for the Pound – because it would have been seen to increase the likelihood of an interest rate hike from the Bank of England. However, since the referendum results were announced BoE Governor Mark Carney has repeatedly promised further loosening measures this summer to assuage ‘Brexit’ fears and stimulate demand.
The BoE’s explicit easing bias meant that Sterling failed to garner support from yesterday’s figure and actually depreciated across the board as traders continued to position themselves ahead of the central bank’s next rate-setting meeting on August 4.
Euro
The Pound to Euro exchange rate weakened by around half a cent yesterday as investors refused to let Sterling appreciate following the EU referendum vote.
Sterling posted its best performance since 2009 last week as traders locked in profits from the Pound’s profound post-‘Brexit’ drop. GBP/EUR also benefited last week from the BoE’s surprise decision to leave rates on hold in July. However, the UK central bank is highly likely to loosen policy at the start of August and this is now dragging Sterling lower.
Data from Germany showed that German investor confidence plunged from +19.2 to a three-year low of -6.8 in July. The impact of ‘Brexit’ was cited by most analysts as the primary point of concern.
US Dollar
‘Cable’ tumbled by around 130 pips yesterday as traders concluded that rising inflation in the UK would not prompt the dovish Bank of England to start raising rates.
UK CPI ticked higher from 0.3% to 0.5% in June, however, the data was collected prior to the referendum on June 23 so does not include the effects of the subsequent steep devaluation of Sterling. British inflation is forecast to carry on rising over the next year as higher import prices lead to price hikes across the country. Analysts predict a peak somewhere between 3%-4% but most expect the BoE to look through the spike and maintain a loose approach to monetary policy in order to stimulate growth. This dovish outlook dampened the appeal of Sterling yesterday and will most likely continue to do so for many months to come.
Canadian Dollar
The Pound ticked lower by around 60 pips against the Canadian Dollar yesterday. In addition to Sterling weakness, related to the dovish BoE outlook, GBP/CAD was also buffeted by a shift in the behavior of global traders. The recent onset of negative yields on government debt has driven many traders in search of less traditional havens, and the Canadian Dollar is one clear beneficiary of this trend. Foreign buyers mopped up C$14.7 billion of Canadian securities in May and the ‘Loonie’ could well rack up further gains against the Pound if the pattern continues.
Australian Dollar
The Pound rose against the Australian Dollar yesterday morning following the release of the Reserve Bank of Australia’s latest minutes report but Sterling pared its gains during the afternoon as BoE easing bets proliferated.
The RBA minutes revealed a dovish outlook and suggested that rates would be cut if future data did not print positively. However, Sterling was hurt by remarks from new British Chancellor Philip Hammond suggesting he was in favour of monetary loosening from the Bank of England.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate lost out on around two cents yesterday as New Zealand dairy prices remained unchanged at auction. The UK labour market report due this morning is expected to show that unemployment remained at 5.0% in May and that wage growth accelerated 2.3%. However, Sterling is not tipped to rise on the figures because markets are prioritising data gathered after the historic EU exit vote.
Data Released
09:30 GBP ILO Unemployment Rate (3M) (MAY) Medium 5.0%
09:30 GBP Average Weekly Earnings (3M/YoY) (MAY) Medium 2.3%