Sterling
The Pound traded with a slight downward bias yesterday as markets reacted to comments from Bank of England policymaker Martin Weale, which appeared to pave the way for additional stimulus next week. Weale, who previously said that more data was required before loosening policy, stated that last week’s seven-year low PMI results were much worse than he had anticipated and cited them as reason to press ahead with ‘immediate’ stimulus.
Traders now believe it is highly likely that the August 4 BoE meeting will see the central bank cut interest rates to a new record low. There is also the possibility of additional quantitative easing funds or other non-standard monetary policy tools, such as raising the inflation target to allow for higher price pressures while the economy adjusts to the depreciation of Sterling, or relaxing loan conditions to encourage commercial banks to lend to the real economy.
Today sees the latest release of UK GDP, with markets expecting economic growth to have accelerated from 0.4% to 0.5% in the second quarter. However, because the majority of the data pertained to the period before the referendum, the print may struggle to have much of a positive impact on the Pound. The UK currency may, however, prove more sensitive to a downbeat score.
Euro
Yesterday marked the four-year anniversary of European Central Bank President Mario Draghi’s pledge to do ‘whatever it takes’ to save the Euro, which many commentators believe actually did save the Euro.
Following Draghi’s commitment to put the full force of the ECB behind the single currency by purchasing unlimited amounts of government debt, the Euro started to steady, Mediterranean bond yields plunged from unsustainable levels and (tepid) economic growth returned to the currency bloc.
In the ensuing years Greece, Portugal, Spain, Italy and Cyprus have all experienced crises but remained part of the currency bloc – partly thanks to Draghi’s robust stimulus package. However, the UK’s historic referendum on June 23 means that Europe will have to work hard to prevent further cases of dissent within the continent. Some analysts believe that ‘Brexit’ will ultimately lead to the dissolution of the bloc; nothing so far suggests this to be the case but it is entirely likely that Mario Draghi and the ECB will continue doing ‘whatever it takes’ to prop up the European project. GBP/EUR has weakened 12 cents in the immediate aftermath of the vote but it will be interesting to see whether the Pound or the Euro is the ultimate loser later down the line.
In the short term, Sterling looks likely to soften versus the single currency as the BoE restarts its stimulus plan. But in the long term, the Euro could be thrown into another existential crisis if the nationalist movements begin to proliferate over the next few years.
US Dollar
The Pound to US Dollar exchange rate remained fairly flat yesterday in response to a mixed bag of data.
Sentiment was dampened by a slowdown in US service sector output, from 51.4 to 50.9, as business activity slowed to a five-month low and price pressures receded. However, consumer confidence printed at 97.3, smashing forecasts of 95.9, and new home sales reached their highest level in nearly eight-and-a-half years.
The data flow suggests that the Federal Reserve would not be reckless if it decided to raise rates at some point in 2016, however, investors reckon there is only a 2.4% chance of a rate hike this evening and just a 25% chance of a dose of tightening in September. The ‘Greenback’ could rally against Sterling this evening if the Fed drops any hints that policymakers are considering hiking rates in September, but the Dollar could suffer slight losses if the US central bank strikes a dovish tone.
Canadian Dollar
The Canadian Dollar struggled again yesterday as oil futures closed below US$43 for the first time since April.
In addition to the trend of falling demand – US petrol stocks are up almost 15% on last year at 240 million barrels and European stocks are around 7% higher than the five-year average – the issue of rising supply lines is likely to return in the near future with Libya set to open oil exports from two of its biggest ports, which have remained closed since 2014 following assaults from the so-called Islamic State. The toxic combination of rising stocks and waning demand means that the commodity-correlated ‘Loonie’s’ gains could remain capped against the Pound until the BoE announcement on August 4.
Australian Dollar
GBP/AUD recovered most of its late night losses yesterday as traders sold the ‘Aussie’ Dollar ahead of a key Australian ecostat. The Pound had initially depreciated in response to Martin Weale’s dovish policy outlook, however, fears that low inflation could prompt a rate cut from the Reserve Bank of Australia drove Sterling higher by the end of the day.
New Zealand Dollar
The New Zealand Dollar rallied by around 130 pips against the Pound yesterday, partly in response to better-than-anticipated trade data. The national trade surplus printed at NZ$127 million in June, thanks in part to a mammoth 47% rise in sales of the Kiwi fruit. The ’Kiwi’ Dollar was also buffeted higher against Sterling by BoE policymaker Martin Weale’s dovish remarks.
Data Released
09:30 GBP Gross Domestic Product (QoQ) (2Q A) Medium 0.5%
09:30 GBP Gross Domestic Product (YoY) (2Q A) High 2.1%
13:30 USD Durable Goods Orders (JUN P) High -1.1%
19:00 USD FOMC Rate Decision (Lower Bound) (JUL 27) High 0.25%
19:00 USD FOMC Rate Decision (Upper Bound) (JUL 27) High 0.50%