Sterling
The Pound surged higher across the board yesterday afternoon. The market-wide moves appeared to follow a speech from UK Prime Minister Theresa May, in which she attempted to assuage business leaders’ concerns that Britain could fall off a ‘cliff edge’, with no trading regulations, the day that the UK officially leaves the European Union. However, several traders stated that the 1% rally in Sterling was too big to have been prompted by May’s comments to business leaders at the Confederation of British Industry (CBI).
PM May hinted that she could pursue a transitional deal to give businesses stability while the government attempts to forge a post-‘Brexit’ trading relationship with the EU. The statement followed speculation that it would be impossible for Britain to clinch a positive trade agreement within the official two-year divorce process, which Downing Street intends to begin in March next year.
Euro
The Pound to Euro exchange rate rallied by over a cent yesterday afternoon to strike a two-month high.
The bumper Sterling rally came after the single currency had actually gotten off to a really good start. GBP/EUR initially tumbled by around half a cent due to positive political sentiment in Europe; traders were cheered by German Chancellor Angela Merkel’s decision to run for a fourth term – Merkel is considered a sign of stability in Europe and is someone who is willing to fight for the European project – while news that Nicolas Sarkozy had been knocked out of the French Republican party candidate race also boosted the Euro because Sarkozy’s divisive nature was seen to increase the chances of traditional right-wing voters defecting to Marine Le Pen’s anti-EU National Front party.
It’s unclear whether Sterling will hold onto yesterday’s sharp gains but it must be noted that investors will not want to be burnt three times – having already seen both the ‘Brexit’ and the Trump votes go against the forecasts of the mainstream pollsters. This means the single currency could well come under more pressure over the next 6-12 months.
US Dollar
‘Cable’ strengthened by around 150 pips yesterday to hit the level that analysts believe it will stay at until the end of the year.
The ‘Greenback’ has been energised by Donald Trump’s shock election victory, which has prompted a massive rise in US – and indeed, consequently, global – inflation expectations due to the President-elect’s plans to borrow big to embark on a massive programme of infrastructure spending. This uptick in inflation expectations has led to a marked rise in Federal Reserve rate hike bets, with the argument being that rising price pressures will force the Fed to tighten aggressively to prevent the US economy from overheating.
The Pound, meanwhile, has reached what some speculators say is ‘fair value’. If these analysts are correct then the 15-20% depreciation since the ‘Brexit’ vote is enough to put Britain on a sustainable budget path, and should limit Sterling’s future losses.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by around a cent yesterday afternoon as demand for the UK currency soared across the board. Whether the move was prompted by UK PM Theresa May’s hints of a transitional ‘Brexit’ deal, or something altogether more mysterious, the rally will come as welcome relief to GBP/CAD traders, who witnessed a sharp two-cent depreciation on Friday.
This afternoon’s Canadian retail sales report is tipped to show that sales volumes accelerated from 0.0% to 0.6% in September, which could give the ‘Loonie’ a little bit of a boost.
Australian Dollar
Sterling strengthened to a seven-week high versus the Australian Dollar yesterday as demand for the Pound ramped up right across the board. The ‘Aussie’ looks susceptible to risk aversion trends, as Donald Trump’s Presidency could see US interest rates rise rapidly, therefore reducing liquidity in the market and weighing on investors’ appetite for risk.
New Zealand Dollar
The Pound also rose by around half a cent versus the New Zealand Dollar yesterday as the afternoon’s spike helped drag Sterling higher across the board.
Data Released
13:30 CAD Retail Sales (MoM) (SEP) Medium 0.6%