Sterling
The Pound received a much-needed shot in the arm yesterday when a High Court lawyer, representing the government, said that UK parliament would have to ratify Britain’s eventual EU exit deal. The news lifted investor sentiment because it suggested that MPs would have the chance to vote against the trade deal if it was seen to pose excessive risks to the UK economy.
Earlier in the day UK inflation printed at 1.0%, up from 0.6% and higher than the market forecast of 0.9%. Worryingly, analysts noted that the weakening of the Pound since the referendum was probably not to blame for the rise in consumer prices. Rather, it was suggested that declines in the pace of food and fuel deflation combined with rising restaurant and hotel prices following a soft August were the real reasons for the uptick.
However, the producer price index hit a three-year high of 7.2%, suggesting that British consumers will soon start to see prices rise as a result of the recent Sterling depreciation.
Euro
Sterling rallied by around 120 pips against the Euro yesterday to strike its highest level in 11 days as hopes that a particularly risky EU trade deal could be outvoted in parliament bolstered British sentiment.
The fact that markets were more sensitive to the parliamentary news shows that political uncertainty, rather than economic fundamentals or monetary policy forecasts, are driving demand for the Pound at the moment. It is interesting that Sterling did not rally initially when the stronger-than-anticipated UK CPI data was released. This suggests that investors are confident that the Bank of England will stick to its word and overlook a Sterling-influenced spike in inflation without resorting to tightening policy.
US Dollar
‘Cable’ bounced higher by around 120 pips versus the US Dollar yesterday, energised by news that the UK government will most likely not be able to push through its ‘Brexit’ trade deal without passing a vote in parliament.
During the afternoon US CPI for September printed at 1.5%, marking a significant acceleration from August’s 1.1%. Most traders saw the result as the latest in a long line of signals suggesting that the Federal Reserve should raise rates in December. GBP/USD did not cede ground on the figure though, due to the surge of optimism created by the High Court ‘Brexit announcement.
This morning’s key release is the UK labour market report, which is tipped to show that British unemployment remained at a decade-low of 4.9% in the three months to August. An unexpected rise could hurt Sterling, while a surprise dip could give the Pound a little bit of a boost.
Canadian Dollar
The Pound to Canadian Dollar exchange rate surged higher by around a cent yesterday, despite comments from OPEC Secretary General Mohammed Barkindo suggesting that next month’s output negotiations should go smoothly.
An important announcement to look out for, in terms of GBP/CAD movements, this afternoon is the Bank of Canada interest rate decision. The BoC is likely to leave rates at 0.50% but there is potential for Governor Stephen Poloz to hint at a future hike because some speculators are concerned with the level of house price growth in the North American nation.
Australian Dollar
Sterling strengthened by just over half a cent against the Australian Dollar yesterday thanks to the uplifting news that the UK government’s EU trade deal will probably need ratifying in British parliament.
New Zealand Dollar
The Pound’s gains against the New Zealand Dollar yesterday were cut short by news that dairy prices rose 1.4% at the latest Global Dairy Trade auction, while whole milk powder jumped 2.9%. Dairy products are the New Zealand economy’s most lucrative exports and subsequently demand for the ‘Kiwi’ increased slightly following the upbeat auction results.
Data Released
09:30 GBP ILO Unemployment Rate (3M) (AUG) Medium 4.9%
09:30 GBP Average Weekly Earnings (3M/YoY) (AUG) Medium 2.3%
15:00 CAD Bank of Canada Rate Decision (OCT 19) High 0.50%
15:00 CAD Bank of Canada Releases Monetary Policy Report High