Sterling
Demand for the Pound remained sturdy yesterday, despite a cautionary financial stability report from the Bank of England.
The BoE noted that the outlook for stability in the British economy remains challenged by Britons’ decision to leave the European Union: ‘The UK economy has entered a period of adjustment following the EU referendum. The likelihood that some UK-specific risks to financial stability could materialise remains elevated’.
However, Sterling, ignoring the BoE report, posted gains across the board yesterday. It appears that an OPEC agreement to cut oil production bolstered demand for the Pound because it was seen to fuel the flames of inflation that were first lit by the ‘Brexit’-related depreciation of the Pound and further stoked by the Donald Trump victory, due to his reflationary policy plans.
Euro
The Pound to Euro exchange rate increased in value by around half a cent yesterday, coming within five pips of striking a fresh 11-week high.
November’s Eurozone inflation report printed inline with economists’ forecasts, rising from 0.5% to a 31-month high of 0.6% as anticipated. However, a German retail report signalled that consumer spending dipped -1.0% in October, confounding calls for positive growth of that amount.
Even at a 31-month high, the Eurozone CPI rate is still far away from the European Central Bank’s 2.0% target and subsequently the prospect of additional monetary stimulus over the next few months remains strong. This dovish dynamic means that we could see the Pound push further ahead against the single currency in this quarter or the next.
US Dollar
‘Cable’ bucked the trend for the ‘Greenback’ yesterday, which was for almost all currencies to decline versus the US Dollar.
It seems that investors were impressed by the OPEC deal in terms of UK inflation and interest rate expectations, which allowed Sterling to flatline versus the US Dollar. OPEC and Russia agreed to cut output for the first time since 2008, which sent crude soaring 9% to over $50 a barrel.
The move is liable to drive price pressures higher around the world, as oil rises from its two-year slumber, and this has been interpreted as bullish for both the US Dollar and the Pound because both nations’ central banks could begin tightening policy in the foreseeable future. Indeed, the Federal Reserve is 99% likely to hike in December, according to market futures rates. The BoE has recently shifted from an outlook of rate cuts to a neutral stance, which could easily turn hawkish if UK inflation expectations continued to swell.
Canadian Dollar
As a large exporter of crude oil, the Canadian Dollar often rises and falls in tandem with the price of ‘black gold’. This trend drove GBP/CAD lower by over a cent yesterday afternoon, however, expectations of higher inflation in the UK due to the deal helped push the Pound back to parity on the day.
Canadian data impressed, showing that economic activity increased 0.3% in September, which drove annualised GDP up from 1.0% to 1.9%. The ‘Loonie’ rallied versus most of the majors in reaction to the robust domestic data and the oil-boosting OPEC deal, however, GBP/CAD was one of the exceptions to the rule.
Australian Dollar
Sterling strengthened by around two cents versus the Australian Dollar yesterday to reach its best exchange rate for over a week. Although the ‘Aussie’ stands to benefit from the uptick in commodity prices and global risk sentiment, the implications of higher oil on BoE policy were seen to outweigh the gains for the Australian Dollar.
New Zealand Dollar
Having struck a 20-day low at the start of yesterday’s session, the Pound to New Zealand Dollar exchange rate managed to leap higher by around 150 pips by the end of the London session following the OPEC oil production cut deal.
Data Released
09:00 EUR Markit Eurozone Manufacturing PMI (NOV F) Medium 53.7
09:30 GBP Markit UK PMI Manufacturing s.a. (NOV) Medium 54.3
10:00 EUR Euro-Zone Unemployment Rate (OCT) Medium 10.0%
15:00 USD ISM Manufacturing (NOV) High 52.4