Sterling
Sterling struggled to post any meaningful gains versus most of the majors yesterday as renewed ‘Brexit’ anxieties proved a drag on demand. Traders are growing increasingly concerned that the government may opt to pursue a so-called ‘hard Brexit’, which would see the UK lose access to the single market to allow for greater controls over immigration. Analysts fear this could negatively impact the nation’s growth prospects and subsequently sentiment towards Sterling has worsened.
The Bank of England’s regional agents, who survey business owners across the country, noted yesterday that consumer spending and housing market activity appears robust, for now. But the BoE agents warned that firms were becoming increasingly reluctant to hire and invest in the aftermath of the ‘Brexit’ vote.
Euro
The Pound to Euro exchange rate remained close to its weakest level in a month yesterday as ‘Brexit’ fears and the subsequent BoE stimulus bets continued to weigh heavily over Pound Sterling.
British data showed that the government was forced to borrow £10.1 billion to balance the books in August, which applied pressure to the UK currency, even though the result was slightly less severe than the median market consensus of £10.4 billion. There were no key European data releases yesterday, but it may be worth keeping an eye out for the European Central Bank’s economic bulletin later this morning. Any remarks from President Mario Draghi on monetary policy could have a little bit of an influence over demand for the single currency.
US Dollar
The Federal Reserve managed to pull off a so-called ‘hawkish hold’ yesterday – meaning the US central bank left interest rates on hold but struck a suitably hawkish message that borrowing costs would be tightened by the end of the year.
Fed Chairwoman Janet Yellen noted that economic growth was improving, the labour market was strong and inflation expectations were beginning to suggest that consumer prices would rise towards the 2.0% target in the medium term. ‘We judged that the case for an increase has strengthened but decided for the time being to wait’, Yellen said.
The majority of markets now project that the Fed will hike rates 25 basis points to 0.50% in December. Indeed, the Fed’s projections suggest that there will be just one rate hike in 2016, down from two previously and four at the beginning of the year. Of the 10 policymakers who voted this time out, seven decided to leave rates unchanged while three dissenters gunned for a September hike.
Despite the hawkish nature of the hold, which boosted equity markets, the US Dollar softened by around half a cent following the Fed statement.
Canadian Dollar
Sterling stumped to a fresh three-week low against the Canadian Dollar yesterday as investors sought the higher yields of the ‘Loonie’ following the Fed’s decision not to raise interest rates in September. A surprise drawdown in US crude stockpiles also propped-up the commodity-correlated Canadian Dollar by boosting oil price 3%.
Australian Dollar
The Pound tumbled by over a cent to strike a fresh monthly low against the Australian Dollar yesterday as markets poured into perceived riskier assets following the Fed announcement.
Risk trends were also boosted by the Bank of Japan’s latest attempts to stimulate price growth. Following years of ultra-low interest rates, the BoJ expanded its stimulus scheme by capping 10-year government bond yields at 0.0%. The efficacy of the programme remains to be seen, but the impact was perceptibly positive for the risk-sensitive ‘Aussie’ Dollar.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate touched a fresh all-time low yesterday evening following the Fed’s decision to refrain from hiking interest rates in September. However, GBP/NZD recovered, slightly, later on in the night when the Reserve Bank of New Zealand left rates on hold at 2.00% but indicated that further stimulus would be required to curtail rising inflation in the future.
Data Released
09:00 EUR ECB Publishes Economic Bulletin Medium
13:30 USD Initial Jobless Claims (SEP 17) Medium 261k
15:00 EUR Euro-Zone Consumer Confidence (SEP A) Medium -8.2