Sterling
Risk aversion trends allowed Sterling to appreciate versus the commodity bloc on Friday, however, hawkish Federal Reserve hiking bets meant that the Pound ended the week lower versus the US Dollar.
Sterling traders were a little disappointed with the neutral tone of Thursday’s Bank of England policy statement, which saw Threadneedle Street leave interest rates on hold at 0.25% and the QE target steady at £435 billion per month. Some analysts had hoped for a slightly more hawkish message due to the recent upshift in inflation expectations, however, BoE Governor Mark Carney argued that Sterling’s recent mini recovery (on a trade-weighted basis the Pound is 6% stronger than it was around the time of November’s BoE meeting) meant that price pressures would not soar fast enough in 2017 to warrant a tightening of monetary policy.
Euro
The Pound to Euro exchange rate ticked higher by around a quarter of a cent on Friday despite the fact that Eurozone inflation hit a 31-month high of 0.6%.
November’s report saw a mild rise in consumer prices, driven largely by rent increases and price hikes at restaurants and cafés. The single currency was not able to build on the multi-month high however because the European Central Bank recently announced plans to run its quantitative easing scheme through 2017, and potentially for even longer. The ECB’s asset purchases have the effect of depressing government bond yields in the currency bloc, which in turn makes Euro-denominated investments less profitable for traders.
In the UK the Confederation of British Industry (CBI) reported that manufacturing orders hit a 20-month high in December, with 21% of firms reporting above-average levels of business. Although the upbeat data appears to suggest that the weakening of the Pound since Brexit has given the export sector a boost by making British goods more affordable to foreign buyers, the CBI noted that Sterling’s depreciation was also pushing up import costs for manufacturers and therefore eating into profit margins.
US Dollar
The Pound rallied by around a cent against the US Dollar on Friday as investors locked in profit from the three-week low that ‘Cable’ struck on Thursday.
The ‘Greenback’ rocketed higher across the board last Wednesday following the Federal Reserve’s announcement that it was raising interest rates from 0.50% to 0.75% in December, with a mind to hiking rates a further three times in 2017. GBP/USD tumbled to a three-week low as analysts, who had previously anticipated two 2017 rate hikes, adjusted their projections.
‘Cable’ is over two cents softer than it was before the Fed announcement but, thanks to bargain hunters, the Pound’s swift descent ceased on Friday afternoon.
Canadian Dollar
The Pound to Canadian Dollar exchange rate strengthened by over a cent on Friday as hawkish Fed rate hike expectations weighed on global risk appetite. The commodity-sensitive ‘Loonie’, however, managed to shrug off news that US oil rig activity surged, which could potentially dampen the effect of the latest OPEC and non-OPEC production cuts.
Australian Dollar
The Pound managed to perform especially well versus the Australian Dollar on Friday, rallying over two cents to a 10-day high as fears that increased inflation in the world’s largest economy would prompt the Federal Reserve to rein-in on cheap borrowing costs. The risk-sensitive ‘Aussie’ plummeted as traders bet that higher US rates would lessen the appeal of the Antipodean currency, which has benefitted in recent years from significantly higher yields than the traditional safe havens.
New Zealand Dollar
Sterling surged three cents versus the New Zealand Dollar on Friday as global risk aversion trends conspired to leave the high-beta ‘Kiwi’ low on investors’ shopping lists. It was a day of threes for the Pound, which rallied three cents to come within three pips of striking a new three-month high.
Data Released
09:00 EUR German IFO – Business Climate (DEC) Medium
14:45 USD Markit US Services PMI (DEC P) Medium