Sterling
The Pound rallied yesterday in response to a statement from the Bank of England’s network of regional agents, who speak to business owners across the country to gauge how the economy is performing. The encouraging report showed that although business uncertainty had ‘risen markedly’ and demand for credit was cooling, the majority of companies did not expect the ‘Brexit’ vote to weigh on investment or hiring plans. The BoE agents also noted that consumer spending had pretty much flatlined since the referendum, which cheered markets who had feared a sharp near-term drop in economic output.
The Pound’s prospects improved further during the evening when BoE policymaker Kristin Forbes said it was prudent to ‘keep calm and carry on’, rather than cutting rates before more sufficient ‘hard data is available’. Forbes’ comments mirrored those of her colleague at the bank Martin Weale, but contrasted with the views of Andy Haldane and the sentiments of Governor Mark Carney.
Sterling was also boosted by news that UK unemployment tumbled unexpectedly to a new 11-year of 4.9% in May thanks to a 54,000 surge in job creation.
Euro
The Pound to Euro exchange rate jumped higher by around 120 pips yesterday following the better-than-anticipated UK labour market report and the BoE’s surprisingly sanguine assessment of the UK economy in the aftermath of ‘Brexit’.
The big event to look out for today is the European Central Bank’s monetary policy announcement. Most market players expect ECB Chief Mario Draghi to leave the benchmark interest rate at 0.00% and the deposit rate at -0.40%, which means a surprise rate cut would most likely lead to a knee-jerk bout of single currency selling. Due to the currency bloc’s tepid inflationary outlook, policymakers have been considering pumping additional stimulus into the Eurozone economy. The prospect of this has only increased post-‘Brexit’ and subsequently there is a good chance that Draghi will employ dovish rhetoric this afternoon, potentially paving the way to further stimulus later in the year.
The prospect of additional rate cuts or bond purchases could easily drag on demand for the Euro tomorrow, however, the single currency would stand to gain if the ECB were to shock markets by playing down the possibility of future measures.
US Dollar
‘Cable’ registered a 140-pip gain yesterday as relatively upbeat business sentiment data from the BoE and positive comments from Kristin Forbes bolstered the appeal of the Pound.
It will be interesting to see how long the UK economy can zip along as if nothing has happened in this uncertain post-‘Brexit’ world. If data continues to reflect favourably on the domestic market following the decision to leave the EU then Sterling could actually start appreciating against the majors. However, the majority of market analysts anticipate a marked slowdown over the next six months and the Bank of England is liable to react to this by loosening monetary policy, which in turn will likely weigh on the Pound.
Canadian Dollar
The Sterling to Canadian Dollar exchange rate leapt higher by around 240 pips yesterday in response to the sanguine UK data flow.
However, the Pound could pull back slightly this morning if British data shows that UK retail sales volumes shrank -0.6% in June, as expected.
Australian Dollar
Sterling posted gains of around 250 pips against the Australian Dollar yesterday as an unexpectedly encouraging day of UK data boosted the appeal of the Pound. Sterling’s gains were particularly impressive against the commodity bloc of the Canadian Dollar, the Australian Dollar and the New Zealand Dollar. These currencies are notoriously volatile and this proved to be the case during yesterday’s session.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate raced ahead to gains of around four cents yesterday. Sterling benefitted from comments suggesting that at least two policymakers may vote against slashing rates next month, while the ‘Kiwi’ Dollar suffered as the Reserve Bank of New Zealand said it was ‘likely that further policy easing will be required’ to keep inflation within the target range.
Data Released
09:30 GBP Retail Sales (MoM) (JUN) 0.6% 4.8%
09:30 GBP Public Sector Net Borrowing (Pounds) (JUN) Medium 9.3b
12:45 EUR European Central Bank Rate Decision (JUL 21) High 0.00%
12:45 EUR ECB Deposit Facility Rate (JUL 21) High -0.40%
12:45 EUR ECB Marginal Lending Facility (JUL 21) High 0.25%
15:00 USD Leading Indicators (JUN) Medium 0.2%