Sterling
The Pound strengthened versus most of the majors yesterday afternoon following a couple of positive developments.
Demand for Sterling picked up after Bank of England policymaker Kristin Forbes broke ranks from the bank’s prevailing view that interest rates would probably remain at rock-bottom levels for the foreseeable future. Forbes suggested that if the economy remains solid and inflation prospects continue to rise this ‘could soon suggest an increase in the bank rate’.
Traders were also cheered by comments from Brexit minister David Jones indicating that parliament would get to vote on a bill that would ‘cover not only the withdrawal arrangements but also the future relationship with the EU’. However, the Sterling uplift could prove short-lived because Jones maintained that if MPs were to vote down the government’s Brexit strategy bill then Britain would still leave the EU – just without a trade deal and would subsequently fall back on costly World Trade Organisation tariffs.
Euro
The Pound to Euro exchange rate rallied by around 75 pips yesterday as a surprising hawkish message out of the Bank of England boosted the appeal of the Pound.
The Euro, for its part, was still reeling from comments on Monday suggesting that monetary policy at the European Central Bank was likely to remain loose for a relatively long time. ECB President Mario Draghi’s said that the bank’s QE scheme could be extended or expanded if economic conditions were to deteriorate. The single currency also suffered from fears that French far-right Presidential candidate Marine Le Pen, who intends to take France out of the Eurozone, could perform better-than-anticipated during this year’s elections.
US Dollar
GBP/USD tanked when markets opened in Europe yesterday due to hawkish comments from Philadelphia Federal Reserve President Patrick Harker. The Philly Fed official said that he would vote for higher interest rates in March, which woke traders to the fact that strong fundamentals could prompt the US central bank to resume its hiking cycle sooner-than-expected.
However, Sterling clawed back all of its losses and rose towards psychological resistance during the afternoon as sentiment towards the Pound improved following a hawkish statement from the BoE.
Canadian Dollar
The Pound to Canadian Dollar exchange rate appreciated by around 150 pips yesterday afternoon as Sterling rode a market-wide wave of optimism. The robust gains followed a strong showing on Monday and means that GBP/CAD is now around two-and-a-half-cents stronger than it was at the start of this week’s session.
Australian Dollar
Sterling ceded strength to the Australian Dollar in the early hours of yesterday morning following the Reserve Bank of Australia’s announcement that it was leaving rates on hold at an historic low of 1.50% in February. The RBA did not stoke rate cut bets with any new dovish rhetoric and this led some analysts to start betting that rates would not be reduced to any new lows.
However, the ‘Aussie’ could not hold onto its gains as GBP/AUD surged during the afternoon.
New Zealand Dollar
New Zealand inflation expectations rose form 1.7% to 1.9% yesterday, prompting a swift jump in demand for the New Zealand Dollar. Demand for the commodity-correlated ‘Kiwi’ ticked higher again at midday when dairy prices rose 1.3% at the latest auction. But the New Zealand Dollar was unable to halt the unstoppable afternoon rally in Sterling and GBP/NZD ended the day very close to where it started.
The main event today for the pair is this evening’s Reserve Bank of New Zealand policy announcement. Traders do not anticipate any moves in interest rates, but any clues as to the future direction of borrowing costs could drive the ‘Kiwi’ higher or lower.
Data Released
20:00 NZD Reserve Bank of New Zealand Rate Decision (FEB 09) High 1.75%
21:00 NZD RBNZ’s Wheeler news conference on policy statement High