Sterling
The Pound softened against most of the majors on Friday, however, there has been a shift in sentiment towards Sterling recently and some investors now reckon the UK currency’s devaluation has run its course. Citing a report from the Bank of England from 2014, which suggested that a -20% Sterling depreciation could reduce the current account deficit by 2%-6%, some analysts believe that the Pound’s -20% fall since the ‘Brexit’ vote is enough to bring the deficit back to sustainable levels.
The theory behind the speculation suggests that currency devaluation increases competitiveness, and therefore demand, for exports, while making imports more expensive, thus disincentivising spending on foreign goods.
Euro
The Pound to Euro exchange rate fell by around half a cent on Friday even though European Central Bank President Mario Draghi hinted at the possibility of more accommodative stimulus.
Speaking in Frankfurt, Draghi said: ‘The ECB will continue to act, as warranted, by using all the instruments available within our mandate’. The ECB President continued to stoke stimulus bets by suggesting that underlying price dynamics were not consistent with a sustainable rise in Eurozone inflation prospects. Analysts concluded that Draghi’s dovish tone meant there was a good chance of additional easing measures over the next few months.
Strangely, the single currency did not weaken following the statement, but there is potential for further rebounds in GBP/EUR if populist nationalist sentiment – which has surged since the unexpected victories for ‘Brexit’ and Trump – continues to grow in the currency bloc.
US Dollar
‘Cable’ slid by almost a cent on Friday to strike a new two-week low as hawkish Federal Reserve sentiment pushed the ‘Greenback’ trade weighted index to its highest level since April 2003.
Expectations of a huge inflationary fiscal stimulus programme from President-elect Donald Trump, which is likely to prompt a swift rise in Fed interest rates, have sent the Dollar soaring since the US Presidential election. Regardless of Trump’s inflationary policy choices, the Fed was gearing up for a rate hike in December and, following a series of hawkish statements from policymakers last week, markets are now pricing a 95% chance of a 25 basis point increase at the December 14 meeting.
Fed President Janet Yellen hinted at a hike last Thursday and fellow policymaker James Bullard backed tighter policy on Friday, remarking that he agreed with the high probability priced into markets of a rate rise next month.
Canadian Dollar
Sterling tumbled by around -150 pips on Friday to hits its lowest level in over a week versus the Canadian Dollar. The ‘Loonie’, supported by rising oil price expectations related to the proposed OPEC production cut deal, was also boosted by an uptick in domestic inflation. October’s CPI report showed that price pressures accelerated from 1.3% to 1.5% last month, which traders saw as a dampener on bets of a near-term rate cut from the Bank of Canada.
Australian Dollar
The Pound to Australian Dollar exchange rate increased by over half a cent on Friday as investors continued to pummel the risk-correlated Antipodean currency in the wake of Donald Trump’s surprise election victory. The ‘Aussie’ tumbled across the board due to concerns that an imminent rise in US interest rates would tighten global liquidity conditions and therefore deter traders from investing in the notoriously volatile Australian Dollar.
New Zealand Dollar
The New Zealand Dollar managed to avoid defeat versus the Pound on the last day of last week’s session. However, the prospect of surging price pressures in the US – and the expected accompanying rate hikes – means that the risk-sensitive ‘Kiwi’ could yet feel the pinch over the coming weeks and months.
Data Released
16:00 EUR ECB’s Draghi Speaks at European Parliament in Strasbourg Medium