Sterling
Sterling snapped a week of steady losses yesterday following a higher-than-forecast inflation report. The Office for National Statistics (ONS) announced that the UK consumer price index rose to a 20-month high of 0.6% in July, beating estimates of 0.5%. The ONS said that there were no ‘obvious impacts’ from the ‘Brexit’ vote in the data but a separate report detailed how the depreciation in Sterling since June 23 has boosted producer prices to the highest level in over two years.
Although the Pound rose slightly across the board following yesterday’s CPI report, the positive sentiment is unlikely to last long because the Bank of England has already signalled that it is willing to look through the short-term impact of the devalued Sterling on inflation. This means further BoE easing can be expected even if the British inflation rate surpasses the bank’s 2.0% target.
Euro
The Pound to Euro exchange rate touched a new three-year low yesterday morning but Sterling managed to claw back its losses following the better-than-anticipated UK inflation data.
In the Eurozone the latest ZEW survey showed that economic sentiment in the bloc rebounded from -14.7 to 4.6 at the start of August, with respondents noting that sentiment had improved since the initial shock of the ‘Brexit’ vote. If economic conditions in the currency bloc remain steady then it may deter policymakers at the European Central Bank from easing monetary policy further, which could benefit the single currency in the long run.
In the short term, the next event to look out for on the economic calendar is today’s UK unemployment report, which is tipped to show that joblessness remained at an 11-year low of 4.9% in June. The Pound will likely weaken if the report disappoints but could rally slightly if the earnings side of the report prints positively.
US Dollar
‘Cable’ mounted an unlikely 150-pip rally during the London session yesterday as traders locked-in profit following the better-than-forecast UK CPI print. GBP/USD had previously been trading at its lowest level for over a month.
Across the pond, the headline US consumer price report saw inflation slow from 1.0% to 0.8% in July, which may have weighed on the ‘Greenback’ by tempering Federal Reserve rate hike bets. However, the day’s other US economic news items reflected positively on the Dollar and the prospect of higher rates. Industrial production came in at 0.7%, smashing forecasts of 0.2%, and Fed policymaker William Dudley hinted that the next rate hike could come as early as the September meeting.
Markets currently reckon there is a 42% chance of monetary tightening from the US central bank this year; it will be interesting to see whether there are any clear signs of hawkishness or dovishness in this evening’s July Fed meeting minutes report.
Canadian Dollar
Sterling rose by around a cent yesterday to rebound from a two-and-a-half-year low against the Canadian Dollar. It seems that the move was influenced by profit-takers rather than by any fundamental shift in sentiment towards the Canadian Dollar. In fact, the price of crude oil– Canada’s most lucrative raw export – rose to a monthly high yesterday, which ordinarily would be expected to bolster the appeal of the commodity-sensitive ‘Loonie’. Granted, CAD’s correlation with oil has fallen back in recent months, but crude is still a massive part of the Canadian Dollar story.
Australian Dollar
The Pound to Australian Dollar exchange rate jumped higher by around 150 pips yesterday to rebound from a multi-year low.
However, the latest minutes report from the Reserve Bank of Australia poured cold water on hopes of further rate reductions.
The RBA cut rates 25 basis points to a record low of 1.5% at the start of August but updated forecasts in the central bank’s meeting minutes suggest that GDP growth is liable to accelerate over the next 12 months – potentially negating the need for further rate cuts.
New Zealand Dollar
A market-wide rally in Sterling drove GBP/NZD higher yesterday even though data in New Zealand showed that the nation’s dairy prices surged 12.7% at the latest auction. If the price of New Zealand’s largest export continues to recover then the additional funds entering the currency could persuade the Reserve Bank of New Zealand to hold off on further rate cuts.
Data Released
09:30 GBP ILO Unemployment Rate (3M) (JUN) Medium 4.9%
09:30 GBP Average Weekly Earnings (3M/YoY) (JUN) Medium 2.4%
19:00 USD U.S. Fed Releases Minutes from July 26-27 FOMC Meeting Medium