Sterling
Sterling softened versus most of the majors at the start of this week’s session as traders bet that this week’s Bank of England announcement would fail to lift the UK currency.
On ‘Super Thursday’ the BoE is set to release its quarterly inflation report alongside its monetary policy plans for February. Threadneedle Street struck a decidedly dovish tone in the immediate aftermath of the Brexit vote but since then a large depreciation in the Pound combined with sanguine domestic growth has led to a swelling of inflation expectations. However, most analysts predict that the BoE will leave interest rates at rock-bottom levels in February – and most likely for the remainder of the year.
If the central bank wrong-foots markets with hawkish rhetoric then we could see the Pound rally on Thursday, however, a cautionary statement from BoE Governor Mark Carney could have the opposite effect.
Euro
The Pound to Euro exchange rate slid by around -80 pips yesterday as sentiment towards Sterling was impacted by dovish BoE bets.
Data in Europe also weighed on GBP/EUR, with a consumer price index report indicating that German inflation jumped from 1.7% to a three-year high of 1.9% in January. The sturdy score, although slightly lower than forecasts of 2.0%, is liable to increase demand for the single currency because it will no doubt fuel resentment towards the European Central Bank’s quantitative easing scheme in Germany. German lawmakers are concerned that the ECB scheme, coupled with ultra-low interest rates, is penalising German savers and disincentivising other Eurozone nations from enacting structural reforms. The ECB argues that loose policy is absolutely necessary in order to support price pressures and ensure economic stability in the currency bloc.
If European data – unemployment, GDP and inflation – comes in positively today, as it is expected to, then we could see GBP/EUR slide a little bit further.
US Dollar
In its first three-day depreciation of the year, the Pound to US Dollar exchange rate shed around -125 pips yesterday. The move was sparked by dovish BoE bets alongside a market-wide mood of risk aversion related to Donald Trump’s US travel ban.
Over the weekend the US President banned citizens of seven countries from visiting America, sparking a backlash from global leaders and disbelief among thousands of protesters worldwide. A petition to prevent Trump embarking on a state visit to Britain reached over one million signatures but the government has signalled that the President’s trip will go ahead.
The market reaction has remained contained so far, but there are fears that Trump’s divisive policy choices could spark unnecessary trade wars and geopolitical conflicts that would likely damage global growth prospects.
Canadian Dollar
Sterling tumbled by around -170 pips versus the Canadian Dollar yesterday ahead of this afternoon’s Canadian GDP figures. Having shrunk -0.3% in October, the November report is tipped to signal a rebound of +0.3%, while annualised growth is predicted to remain in the region of 1.4%. Although the prospects of tighter monetary policy in Canada look fairly slim, there is always potential for the ‘Loonie’ to rally if sturdy figures boost rate hike expectations.
Australian Dollar
GBP/AUD continued to reverse last week’s gains yesterday, declining -150 pips as traders bet against a hawkish statement from Bank of England Governor Mark Carney on Thursday. Expectations for upbeat trade surplus and commodity export figures later on in the week also underpinned demand for the ‘Aussie’ yesterday.
New Zealand Dollar
The Sterling to New Zealand Dollar exchange rate sank to a 10-day low yesterday after registering a sharp -170 pip decline. And the potential for additional ‘Kiwi’ gains exists this evening in the form of the fourth quarter New Zealand labour market report, which is anticipated to see unemployment plunge to a new eight-year low of 4.8%.
Data Released
08:55 EUR German Unemployment Rate s.a. (JAN) High 6.0%
09:30 GBP Mortgage Approvals (DEC) Medium 68.9k
10:00 EUR Euro-Zone Unemployment Rate (DEC) Medium 9.8%
10:00 EUR Euro-Zone Gross Domestic Product s.a. (YoY) (4Q A) High 1.7%