Sterling
Speaking at the World Economic Forum in Davos, UK Prime Minister Theresa May attempted to reframe Britain’s decision to leave the European Union as a globalist, rather than a nationalist venture. The PM argued that leaving the EU would give Britain opportunities to arrange trade deals with nations from all over the globe, not just the closest continent. This message was generally taken well by the markets, and Sterling ticked higher versus most of the majors during yesterday’s session.
Question marks remain over the UK government’s ability to live up to its Brexit pledges but traders appear happy with this week’s developments. After months of mist, the semblance of a Brexit strategy appears to be forming on the horizon.
Euro
The Pound to Euro exchange rate rallied by around half a cent yesterday afternoon as dovish European Central Bank rhetoric depressed demand for the single currency.
Markets were not surprised to the see the ECB leave policy on hold, with interest rates remaining at 0.00% and monthly asset purchases staying at €80 billion per month, but the cautionary tone of President Mario Draghi’s press conference led to a bout of selling pressure on the Euro. Draghi warned that interest rates would remain low for an extended period and noted that asset purchases could be increased or extended if the outlook were to worsen.
Eurozone CPI struck a three-year high in December but Draghi brushed this fact aside, claiming that most of the uptick in price pressures was a result of rising oil prices. The ECB Chief also described the currency bloc’s economic recovery as ‘dampened by the sluggish pace of structural reform’ and maintained that a ‘very substantial’ degree of monetary stimulus was required to help drive the region forward. All of this combined to raise stimulus expectations and weaken demand for the single currency.
US Dollar
‘Cable’ ticked higher by around 60 pips yesterday as traders reacted positively to comments from Theresa May on Britain’s commitment to remain a player on the global stage. Fears of isolationism were soothed, for the moment at least, by the British PM’s vision of building ‘relationships with old friends and new allies alike’.
In the United States, housing starts printed positively at 11.3%, rebounding from -16.5% previously. Jobless claims also impressed, sliding from 249,000 to a 43-year low of 234,000. The sturdy labour data is liable to feed into hawkish Federal Reserve rate hike bets and further gains for the US Dollar remain a strong possibility this year.
Volatility can be expected in GBP/USD this afternoon around the time of Donald’s Trump’s Presidential Inauguration. Any further information on policy could boost the ‘Greenback’ if pledges to inject fiscal stimulus into the economy are revisited, however, there is potential for the US Dollar to stumble if President Trump remains as vague as Presidential candidate Trump and President-elect Trump.
Canadian Dollar
Sterling jumped almost two cents to hit a fortnightly high against the Canadian Dollar yesterday. It seems that traders were keen to apply downward pressure to the ‘Loonie’ following Wednesday’s Bank of Canada policy statement, which saw Governor Stephen Poloz hint that interest rates would remain low for the foreseeable future.
Canadian CPI is predicted to rise from 1.2% to 1.7% this afternoon, which could kick start a revival for the Canadian Dollar.
Australian Dollar
The Pound to Australian Dollar exchange rate remained flat on the day yesterday as the prospect of ultra-loose policy in the Eurozone buoyed global risk sentiment and prevented Sterling registering any gains versus the risk-sensitive ‘Aussie’, which saw unemployment rise unexpectedly from 5.7% to 5.8%.
New Zealand Dollar
GBP/NZD also traded with a neutral bias, with traders pausing for thought following the large moves earlier on in the week surrounding Theresa May’s much-awaited Brexit strategy speech.
Data Released
09:30 GBP Retail Sales (YoY) (DEC) Medium 7.5%
13:30 CAD Consumer Price Index (YoY) (DEC) High 1.7%
13:30 CAD Retail Sales (MoM) (NOV) Medium 0.5%
14:00 USD United States Presidential Inauguration High