Sterling
The Pound rocketed higher versus most of the majors yesterday following a robust UK manufacturing report.
At 55.9, the headline PMI index remained close to December’s two-and-a-half-year high of 56.1, while output accelerated at a 32-month high. Shockingly, input prices – the costs paid by UK manufacturers for raw materials – surged to an all-time high of 88.3. Those of you who follow the PMI figures will know that 50.0 is the mark that separates growth from contraction and that sub indexes rarely print outside of the 40-60 range. The Pound’s 15-20% depreciation since the EU referendum was cited by many as the reason for the jump in prices, while other inflationary pressures such as rising oil and plastic prices also contributed.
The main event for the Pound today is the Bank of England’s policy announcements at midday. The UK central bank is likely to leave policy on hold but we could see fluctuations in Sterling if Governor Mark Carney hints that rising inflation could prompt a rate hike later on in the year. This could send GBP higher, however, any explicit signal that the bank is prepared to look through a potential CPI overshoot would likely weigh on the UK currency.
Euro
Sterling strengthened by around a cent versus the single currency yesterday as sturdy UK manufacturing numbers supported the Pound.
GBP/EUR also appeared to be boosted by a leaked report from the European Commission stating that the EU economy would lose out if negotiators fail to agree on a ‘workable’ Brexit deal. The document will certainly be music to Brexit minister David Davis’ ears and it should provide the government with some added ammunition in the upcoming trade talks. It seems that holders of Sterling were also cheered by the leak, and its positive implications for the future trading relationship between Britain the EU.
During the evening, GBP/EUR flatlined following news that British MPs had voted in favour of triggering Article 50 of the Lisbon Treaty.
US Dollar
The Pound to US Dollar exchange rate rose by around 75 pips during the London session yesterday as sentiment towards Sterling fizzed.
The ‘Greenback’ rallied versus other currencies on the back of a smashing US ADP employment report, which printed at 246,000 compared to forecasts of 165,000. The impressive result was seen to bode well for Friday’s more influential non-farm payroll labour report. The US Dollar was also supported by a 22-month high factory growth index of 55.0 in January, up from 54.3 in December. However, it was not enough to reverse GBP/USD’s earlier gains.
‘Cable’ drifted higher by a further 30 pips during the evening when the Federal Reserve left rates on hold at 0.75% and predicted that inflation would overshoot its 2.0% target in the ‘medium term’. The US central bank said that risks to its outlook – for three additional rate hikes in 2017 – were ‘roughly balanced’, which failed to lift Fed hike expectations and subsequently prompted a small bout of US Dollar selling.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by around 130 pips yesterday despite Canadian manufacturing output performing well, printing at 53.5 in January, up from 51.8 in December. The commodity-sensitive ‘Loonie’ lost ground as oil prices tumbled on news of another large build in US oil inventories.
Australian Dollar
Sterling appreciated by around 120 pips versus the Australian Dollar yesterday as the Pound attracted market-wide demand ahead of the UK parliament’s Brexit vote. Meanwhile the ‘Aussie’ continued to be dogged by Reserve Bank of Australia rate cut fears following this week’s underperforming CPI print.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate roared to a new three-week high yesterday, rallying by around two cents following Tuesday evening’s surprise jump in unemployment. The domestic jobless rate leapt from 4.9% to 5.2%, which was seen to bode badly for Reserve Bank of New Zealand rate hike expectations.
Data Released
12:00 GBP Bank of England Rate Decision (FEB 02) High 0.25%
12:00 GBP BOE Asset Purchase Target (FEB) High 435b
12:00 GBP Bank of England Inflation Report High
12:30 GBP Carney Speaks at Inflation Report Press Conference High