Sterling
Before the days of Brexit, Trump and Supreme Court judgements the Pound would have been expected to rally on news that Britain’s dominant service sector expanded at its fastest pace for 10 months. News hit the wires yesterday morning that UK service sector output surged unexpectedly from 54.5 to 55.2 in November, but the robust PMI print barely moved the UK currency. These days, economic stats – even the most high profile – have been thrown under the shadow of political developments. And the political events that are affecting Pound Sterling at the moment are the Supreme Court judgement on Brexit and the Italian constitutional referendum.
Yesterday British judges began hearing an appeal, which is due to be concluded on Thursday, from the government against a ruling stating that Downing Street would need parliamentary ratification before triggering Article 50 of the Lisbon Treaty. If Prime Minister Theresa May wins the appeal, the Pound stands to weaken in line with rising ‘hard Brexit’ bets. Conversely, the likelihood of the government opting to retain access to the single market in order to soothe MPs’ concerns will likely drive Sterling higher if the Supreme Court rules that parliamentary ratification is, in fact, necessary.
Euro
The Pound to Euro exchange rate leapt to its highest level since July yesterday morning as traders reacted to the Italian constitutional referendum, which saw PM Matteo Renzi announce his resignation after a heavy defeat. However, as the day went on bargain hunters seized on the four-month high GBP/EUR rate to purchase Euros at a much better rate than we have seen for a long time. This took Sterling slightly lower versus the single currency.
Another reason for the Euro’s recovery was the fact that, unlike Brexit and Trump, pollsters had been predicting a loss for Matteo Renzi for many months leading up to the vote. Additionally, the idea of Italy forming a new government is not something out of the ordinary: the nation has seen 64 different governments since World War II.
The main issue for currency traders now is whether there will be early elections or whether a technocratic government will be formed. Traders are fearful of early elections because of the large support for the anti-EU Five-Star Movement party, which aims to take the Eurozone’s third largest economy out of the currency bloc – a move that could easily lead to the unravelling of the Eurozone on a grander scale. However, the general consensus is that Italian President Sergio Mattarella will not risk aggravating the situation further with fresh elections and will instead opt to form a temporary technocratic government to steady the ship. This should keep demand for the single currency stable, for now.
US Dollar
‘Cable’ rallied to a new two-month high yesterday as both the UK and the US saw sturdy service sector results for November.
The unexpectedly large increase in non-manufacturing output in America last month – the indicator rose from 54.8 to 57.2, outpacing forecasts of 55.5 – adds fuel to the roaring fire of Federal Reserve rate hike bets. Markets are essentially as close to being certain as they could be that the Fed will raise interest rates later this month – a full year after lift-off on rates last December. In addition to this, the bullish reflationary policies that Donald Trump aims to implement mean that the US central bank may be forced to accelerate its hiking cycle through 2017 to stop the economy overheating. This hawkish outlook means that we could easily see the Pound give back some of its recent gains against the US Dollar before Santa visits on Christmas Eve.
Canadian Dollar
Sterling traded stronger against the Canadian Dollar initially yesterday, before sliding back by around -80 pips on news that Canada’s most lucrative export rallied to a 16-month high. A general mood of risk aversion has prevented the commodity-sensitive ‘Loonie’ from making any significant gains versus the Pound following last week’s watershed OPEC breakthrough deal to curb oil production in order to drive prices higher. However, GBP/CAD did take a tumble yesterday. Sadly for the Canadian Dollar, we could see the Pound rise again if Wednesday’s Bank of Canada rate announcement sees the kind of dovish rhetoric that investors are expecting.
Australian Dollar
The Australian Dollar recovered some of its recent losses versus Sterling yesterday ahead of a central bank announcement from the Reserve Bank of Australia that few analysts anticipated would see a change in interest rates.
New Zealand Dollar
Political uncertainty continued to dog the New Zealand Dollar yesterday following the shock resignation of Prime Minister John Key. However, GBP/NZD’s gains were contained and some traders are hoping for a strong result at today’s dairy auction. Dairy products are New Zealand’s biggest export, so the ‘Kiwi’ Dollar often rises and falls in tandem with the fortnightly auctions.
Data Released
GBP UK Supreme Court Hears Government-Parliament Brexit Appeal High
NZD Dairy Auction Avg. Winning Price MT (DEC 6) Medium $3,519
10:00 EUR Euro-Zone Gross Domestic Product s.a. (YoY) (3Q F) Medium 1.6%
15:00 USD Durable Goods Orders (OCT F) Medium 4.8%