Sterling
Although the Pound was unable to hold onto its morning gains yesterday, the recent rise in price pressures does bode well for the UK currency going into the New Year.
Sterling initially rallied across the board yesterday in response to the fastest increase in British inflation for over two years. The consumer price index was reported to have risen from 0.9% to 1.2% in November, beating the median consensus of 1.1%. CPI may still be some way off the Bank of England’s 2.0% target, however, the post-Brexit depreciation of the Pound has eaten into importers’ profits and subsequently prompted a string of price hikes from retailers.
These price increases are predicted to accelerate in 2017 and some analysts reckon that we could see British inflation top 3.0% in the medium term. If these forecasts prove accurate – a big IF considering the inefficacy of almost all Brexit related forecasts so far – then the BoE could be persuaded to start raising rates, which would likely lead to an appreciation in Sterling.
Euro
The Pound to Euro exchange rate surged higher by around 80 pips yesterday morning when the outperforming November UK CPI report hit newswires. However, Sterling swiftly ceded its gains to the single currency during the afternoon.
In the Eurozone it was announced that German inflation remained at 0.8% in November and that investor sentiment remained at 13.8 at the beginning of December. The static ecostats had little impact on demand for the Euro.
We could see the Pound push ahead this morning if October’s labour market report impresses. Analysts are expecting the unemployment rate to remain at decade low of 4.8% but most traders will be looking to the wage data for signs of growth – which will be needed if UK price pressures do in fact soar next year.
US Dollar
Sterling failed to maintain gains of around 40 pips versus the US Dollar yesterday. There are a couple of important events to look out for today: the aforementioned UK labour report, US retail sales data, US industrial production, but by far and away the most anticipated is this evening’s Federal Reserve policy announcement.
The Fed is almost certain to hike rates 25 basis points to 0.75%. This much is priced into GBP/USD and should not have much of an impact on the pair. Traders will be looking for hawkish signs for 2017: if Fed Chairwoman Janet Yellen paves the way for a stream of additional rate rises next year, and this is corroborated by the central bank’s dot plot projection graph, then the ‘Greenback’ is liable to rally.
But if the world’s most powerful central bank errs on the side of caution and retains a wait-and-see approach then the market disappointment could actually lead to losses for the US Dollar.
Canadian Dollar
The commodity-sensitive ‘Loonie’ remained well-bid yesterday following the weekend deal between Saudi Arabia and a number of non-OPEC states, of which the most notable was Russia, to cut oil production in 2017.
However, it was a decidedly Sterling story yesterday as GBP/CAD rallied in the morning in response to the two-year high inflation print and then tumbled in the afternoon as profit-taking stances kicked in. It will be interesting to see how the Fed communicates this evening: a strong hawkish message could damage the Canadian Dollar, while a neutral tone could give risk assets a bit of a boost.
Australian Dollar
Iron ore prices ticked higher yesterday, reaching two-year highs in a move that has left analysts ‘baffled’. The commodity is one of Australia’s most lucrative exports and as such the ‘Aussie’ attracted buyers on the back of the iron rally. Overall. GBP/AUD closed flat on the day as the two-year high iron price was met by a two-year high UK inflation print.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate succumbed to a minor defeat yesterday as profit-taking stances took GBP/NZD lower from the intraday high reached after British inflation outperformed analysts’ expectations.
Data Released
09:30 GBP Average Weekly Earnings (3M/YoY) (OCT) Medium 2.3%
09:30 GBP ILO Unemployment Rate (3M) (OCT) Medium 4.8%
10:00 EUR Euro-Zone Industrial Production w.d.a. (YoY) (OCT) Medium 0.8%
13:30 USD Advance Retail Sales (NOV) High 0.3%
14:15 USD Industrial Production (NOV) Medium -0.4%
19:00 USD Federal Open Market Committee Rate Decision (DEC 14) High 0.75%
19:00 USD Fed Summary of Economic Projections High