Sterling
Sterling made ground versus most of the majors yesterday ahead of today’s consumer price index report. The August inflation print is predicted to show that price pressures accelerated from 0.6% to 0.7% last month, however, the rise is unlikely to have as much of an impact on the Pound as it could have done had we voted to remain in the European Union.
For months – years even – the Bank of England waited for the signs of underlying price growth that it felt it needed to justify raising interest rates. However, despite a rapid slide in unemployment, the inflation rate just wouldn’t budge and the BoE left rates at record lows. Then the referendum came around, and Britons voted to leave the European Union. The BoE responded by cutting interest rates and launching a raft of stimulus measures.
Sterling depreciated between 10-12% following the ‘Brexit’ decision – which is likely to drive consumer prices higher as import prices increase – prompting BoE Governor Mark Carney to assert that the bank would look through near-term spikes in CPI in order to support the economy with loose monetary policy.
This means that Sterling may prove insensitive to the August inflation report, even if it comes in stronger-than-anticipated.
Euro
The Pound rallied by around half a cent against the Euro yesterday as global markets suffered some of the largest losses since the day Britain voted for ‘Brexit’.
The worldwide sell-off appeared to reflect concerns that central banks may be on the verge of normalising monetary policy. The primary factor was a spike in Federal Reserve rate hike bets over the weekend, while the European Central Bank’s decision to leave policy unchanged last Thursday also factored into the equation.
Though the UK has been plagued by uncertainty for most of the year, the devalued Pound is now creating an interesting buy opportunity for foreign investors. The relative value of Sterling-denominated corporate debt, combined with higher yield levels than European equivalents, is driving investment in the UK – and subsequently the UK currency. This trend is helping to keep the Pound on top, in the short term, versus the single currency.
US Dollar
Republican presidential nominee Donald Trump took a break from absurd construction plans and National Socialist Party-esque policies to berate the Federal Reserve yesterday. Trump branded the US central bank ‘not even close to independent’ and claimed Chairwoman Janet Yellen should be ‘ashamed’ of keeping interest rates low to appease President Barack Obama. Fed official Neel Kashkari rebutted Trump’s claim and asserted that monetary policy is set in line with the economy and nothing else.
Fed rate hike bets were dealt a more serious blow later on in the day when policymaker Lael Brainard said that the central bank should hold off on hiking rates this month. Brainard cited tepid inflationary pressures and economic uncertainty abroad as reasons to remain on the sidelines at this juncture. The dovish remarks helped Sterling rack up a daily gain of around 60 pips versus the US Dollar.
Canadian Dollar
The Pound appreciated by over a cent to strike a 10-day high against the Canadian Dollar yesterday as risk-correlated currencies continued to feel the squeeze from a post-summer sell-off in financial markets. The ‘Loonie’ is seen as especially susceptible to shifts in market sentiment due to its correlation with its biggest export – crude oil – and subsequently the Canadian currency often cedes ground during times of market uncertainty.
Australian Dollar
Sterling strengthened by around 80 pips against the Australian Dollar yesterday to hit a 20-day high as the ‘Aussie’ suffered on a day of global risk aversion. Federal Reserve policymaker Lael Brainard’s dovish remarks helped alleviate the pressure on the risk-correlated Antipodean currency during the evening but it was too little, too late to stop GBP/AUD reaching a multi-week high.
New Zealand Dollar
The New Zealand Dollar shared a similar fate to its commodity-correlated cousins the ‘Loonie’ and the ‘Aussie’ yesterday. Sterling rallied by around 75 pips versus the ‘Kiwi’ Dollar to reach a weekly high on a day when volatile assets found it difficult to attract new investment.
Data Released
09:30 GBP Consumer Price Index (YoY) (AUG) High 0.7%
10:00 EUR Euro-Zone ZEW Survey (Economic Sentiment) (SEP) High 4.6