Sterling
The main ecostat to keep an eye out for today is November’s UK consumer price index. Analysts reckon that inflation accelerated from 0.9% to 1.1% last month, and if price pressures start to swell it could put pressure on the Bank of England to move away from an easing cycle and into a hiking mindset. Indeed, data released last Friday showed that Britons expect CPI to hit 2.8% by this time next year and BoE policymakers have already softened their dovish rhetoric and curbed plans for further monetary loosening.
The Pound stands to gain if inflation expectations continue rising and a BoE rate hike comes back into play, however, if price pressures soar too high it could damage the UK economy in the long run by eroding real wage growth.
Euro
The Pound to Euro exchange rate shifted up and down yesterday with no real directional bias. GBP/EUR remained capped below psychological support but is around 10 cents stronger than its closing low two months ago and 15 cents stronger than the intraday low of October 7th’s flash crash.
The single currency has suffered since Italian Prime Minister Matteo Renzi resigned last week and, although early election fears were quashed by the announcement of a technocratic government, investors remain anxious over the future of Italy’s third largest bank, Monte dei Paschi. The world’s oldest working bank is attempting to raise €5 billion from private investors, but many speculators believe that a government bailout will be required. The Euro is feeling the weight of these concerns because the prospect of economic malaise in Italy inevitably leads to fears of political instability and enhanced support for populist parties such as the anti-EU Five-Star Movement.
US Dollar
Sterling rallied by around a cent versus the US Dollar yesterday as speculative investors cut short positions (bets that the Pound will weaken) to the lowest level since August.
There also appeared to be a little bit of repositioning ahead of Wednesday’s Federal Reserve policy announcement. Markets are 97% sure that the Fed will tighten policy but traders are now considering the potential for future rate hikes in 2017. Traders reckon the US central bank will raise rates a further 50 basis points next year, but some analysts warn that the Fed may opt to leave the door open to further hikes without explicitly paving the way.
This time last year the Fed upped rates and projected a further 100 basis points of hikes, but as we now know those predictions did not come to pass. In order to preserve its credibility, the world’s most powerful bank may strike a softer tone this time around, which could potentially wrong-foot hawkish traders and put pressure on the ‘Greenback’.
Canadian Dollar
Despite crude oil striking a 17-month high yesterday on the back of this weekend’s non-OPEC and Saudi Arabian production cut announcements, the Canadian Dollar was driven lower against the Pound yesterday.
The commodity-sensitive ‘Loonie’ initially jumped a cent on the news that 11 non-OPEC states had agreed to cut output by 550,000 barrels per day, which combined with last month’s OPEC deal and fresh Saudi cuts would leave global oil production -2% lower in 2017. However, profit-takers seized the opportunity and pushed GBP/CAD higher to erase the Canadian Dollar’s weekend gains.
Australian Dollar
The aforementioned oil spike boosted risk appetite during the Asia-Pacific session on Monday but it was not enough to lift the risk-sensitive Australian Dollar versus the Pound. The Australian economic docket is fairly empty at the start of the week, so we could see Sterling push ahead if this morning’s UK CPI report prints strongly.
New Zealand Dollar
The Sterling to New Zealand Dollar exchange rate held fairly steady over the course of yesterday’s session. Sterling stands to gain if this morning’s inflation numbers boost long term Bank of England rate hike expectations, but a weak print could give the ‘Kiwi’ impetus to rally.
Data Released
09:30 GBP Consumer Price Index (YoY) (NOV) High 1.1%
10:00 EUR Euro-Zone ZEW Survey (Economic Sentiment) (DEC) High 15.8