Sterling
The Pound’s recent rally came to an inevitable end yesterday, with the UK currency sustaining losses versus most of the majors.
The most important UK data release to look out for this morning is the latest revision to second quarter growth, which is expected to be confirmed at 0.6%. However, unless we’re treated to a severe positive or negative revision, the print is unlikely to have a material impact on demand for Sterling because the data only includes one week of economic activity following the vote to leave the European Union.
The Pound has performed fairly well over the past two weeks, thanks to sanguine post-‘Brexit’ figures for retail, jobless claims and manufacturing exports. But analysts caution that the full impact of the ‘Brexit’ vote could take a little bit of time to seep through the wider economy and subsequently Sterling remains susceptible to further losses over the next few months.
Euro
The Pound to Euro exchange rate softened by over half a cent from a fortnightly high yesterday, despite encouraging UK data and disappointing figures across the Channel.
A report from the Confederation of British Industry (CBI) showed that UK retail sales volumes were the highest for six months during August. The sunny weather was cited as motivation behind the sales growth, as 35% of retailers witnessed rising sales while just 26% saw volumes decline. The headline index of +9 marked an encouraging rebound on July’s -14, however, it was not enough to lift Sterling versus the single currency. EUR gained despite the latest Ifo business survey showing that investor sentiment in Germany dipped unexpectedly from 108.3 to 106.2 this month.
US Dollar
‘Cable’ sank by around half a cent yesterday as Sterling’s short-covering rally came to an end and investors ramped up their Federal Reserve rate hike bets.
All eyes will be on the Fed this afternoon, when Chairwoman Janet Yellen gives her first address on monetary policy in weeks. The Jackson Hole Symposium was not traditionally a place for immediate policy hints –rather a platform for wider conceptual discussion –however, former Fed President Ben Bernanke often signalled shifts in policy at the event. Subsequently the media attention has shifted away from the real purpose of the meeting and now focusses almost entirely on the implications for near-term monetary policy decisions.
Rhetoric from other Fed officials in recent weeks has touched on improvements in the labour market and inflation prospects, which has raised market expectations of a hawkish speech from Janet Yellen. However, the futures markets currently suggests just a 24% chance of a rate hike in September, meaning that an explicit hint about not tightening next month could lead to a sharp rise in demand for the ‘Greenback’ and a steep decline in GBP/USD.
If Yellen remains cautious, it could boost the Pound versus the US Dollar a little bit. But generally speaking: this is the outcome that most investors are anticipating.
Canadian Dollar
Sterling tumbled by around half a cent against the Canadian Dollar yesterday as the Pound’s recent rally broke down. The ‘Loonie’s’ gains were muffled by a drop in oil prices and market chatter surrounding the possibility of tighter monetary policy south of the border. GBP/CAD is liable to appreciate if Fed President Janet Yellen talks up the possibility of a 2016 rate hike.
Australian Dollar
The Pound to Australian Dollar exchange rate tumbled by around 70 pips yesterday as demand for the Pound eased. In terms of GBP/AUD, today’s session is all about the Federal Reserve: if Janet Yellen hints at a 2016 rate hike then the Pound will likely rebound, but if the Fed Chairwoman sounds a dovish tone then the risk-sensitive ‘Aussie’ stands to gain.
New Zealand Dollar
The usually volatile GBP/NZD exchange rate was actually one of most subdued Sterling crosses yesterday. The Pound drifted lower by around a third of a cent but larger moves can be expected this afternoon. As with the Australian Dollar, any hawkish Fed sentiments could hurt the ‘Kiwi’, while any signs of caution could prompt a surge in demand.
Data Released
09:30 GBP Gross Domestic Product (QoQ) (2Q P) Medium 0.6%
09:30 GBP Gross Domestic Product (YoY) (2Q P) High 2.2%
13:30 USD Gross Domestic Product (Annualized) (2Q S) High 1.1%
15:00 Fed Chair Yellen to Speak at Jackson Hole Policy Symposium High