Sterling
The Pound softened across the board on Friday as unimpressive domestic construction data compounded negative sentiment towards the UK currency.
The Office for National Statistics (ONS) reported that construction output shrank -1.5% in August, confounding expectations of a +0.2% expansion. Analysts said a huge -5.1% drop in infrastructure projects, which was probably not related to the referendum vote in any way, was the main driver behind the uninspiring result. It is feared that the construction industry could be heading for recession but some commentators are hopeful that Chancellor Phillip Hammond will announce new plans for public sector investment in his autumn statement. Housebuilding, high-speed rail and a new runway at Heathrow are some of the proposed projects.
Euro
The Pound to Euro exchange rate traded flatly for most of Friday’s session as demand for Sterling remained constrained by fears regarding a so-called ‘hard Brexit’.
Investors appeared concerned by comments from French finance minister Michel Sapin suggesting that US banks were readying plans to relocate from Britain to the continent, now that it appears certain ‘Brexit’ will happen by March 2019. Sapin’s remarks followed a statement from European Council President Donald Tusk indicating that there could only be one kind of divorce from the European Union – and that would be a hard cut.
The British government appears set to sacrifice access to the single market in return for greater means to influence immigration policy, however, a recent poll conducted by ComRes shows that a higher number of Britons believe trade should be prioritised over immigration controls. GBP/EUR has declined by around five cents since the Tory party conference, where Prime Minister Theresa May outlined plans to pursue a ‘Brexit’ without access to the single market.
US Dollar
‘Cable’ weakened by around half a cent on Friday as demand for the US Dollar was bolstered by robust consumer spending figures. The latest US retail sales report showed a 0.6% expansion in September, which marked a strong rebound on August’s disappointing -0.2% decline.
The upbeat report boded well for hopes of a rate hike from the Federal Reserve, however, a statement laterin the day from Chairwoman Janet Yellen dragged market futures rates lower, suggesting a slightly lower probability of a move to tighten policy in December. Yellen put forward the idea of a ‘high-pressure economy’, which she said could include further measures to lower unemployment and boost consumption, even at the risk of letting inflation overshoot. The idea that inflation could be allowed to overshoot the Fed’s 2.0% target was seen as negative for rate hike bets and investors now believe there is a 64% chance of a rate rise in December.
Canadian Dollar
The Pound to Canadian Dollar exchange rate slumped -150 pips on Friday as risk appetite returned following some better-than-anticipated Chinese inflation data. The latest price pressure numbers from the world’s second largest economy showed that CPI accelerated from 1.3% to 1.9% in September, which beat estimates of a 1.6% figure. Producer prices also improved, rising out of the red to 0.1% for the first time in almost five years. The upbeat inflation reports bolstered global risk sentiment and this lifted demand for the commodity-correlated ‘Loonie’.
Australian Dollar
Another currency pair that felt the wrath of resurgent global risk appetite was GBP/AUD, which suffered a -180-pip daily defeat following the sturdy Chinese inflation numbers. The most important event on today’s economic calendar for the Australian Dollar is this evening’s speech from recently appointed Reserve Bank of Australia Governor Philip Lowe. If Lowe rules out the possibility of further RBA easing then the ‘Aussie’ could surge, but if he leaves the door open to additional stimulus then we could see the Pound recover some of its recent losses.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate tumbled by around half a cent on Friday as negative ‘Brexit’ sentiment and soft construction figures weighed on the Pound, while better-than-anticipated Chinese CPI data boosted the appeal of the risk-sensitive ‘Kiwi’ Dollar.
However, later today third quarter New Zealand CPI inflation is predicted to print at 0.1%, marking a slowdown on the second quarter’s score of 0.4%, and it is possible that GBP/NZD could trade higher if the numbers are seen to boost Reserve Bank of New Zealand rate cut forecasts.
Data Released
10:00 EUR Eurozone Consumer Price Index (YoY) (SEP F) Medium 0.4%
14:15 USD Industrial Production (SEP) Medium -0.1%
22:10 AUD RBA Governor Lowe Speech in Sydney Medium