Sterling
The Pound performed well at the start of this week’s session due to optimism that this morning’s UK CPI report could strike a new two-and-a-half-year high, which some analysts reckon could pre-empt a more hawkish tone from the Bank of England. British price pressures hit a two-year high of 1.6% in December and markets believe that the consumer price index jumped to a new high of 1.9% in January. This would take inflation to a smidgen below the BoE’s 2.0% target. Policymakers at the central bank have noted that they are comfortable with a temporary overshoot of the target rate, which they believe is related to the 15-20% depreciation of Sterling since the EU referendum in June.
However, if the inflation rate sticks above target for longer-than-projected the bank may be prompted to start raising rates sooner rather than later, and it is this scenario that the Sterling bulls are betting on.
Euro
Investors’ love affair with the single currency took a turn for the worse yesterday due to continued concerns that nationalist populism could tear European relations to shreds over the next few years. The Pound to Euro exchange rate struck a six-week high as traders hedged against the rise of anti-EU sentiment in the currency bloc this year – elections in Germany, France and Holland are considered the key risks, while Italy could also go to the polls.
Sentiment towards the single currency was also hurt by the latest leg of the Greek debt crisis, which some fear could finally see the Hellenic nation expelled from the Eurozone. Although Europe could probably cope with a Grexit scenario in isolation, the currency bloc could run into existential trouble if other struggling member states start to consider life outside of the Eurozone.
US Dollar
‘Cable’ strengthened by around a third of a cent yesterday, driven by expectations that rapidly rising inflationary pressures could prompt a shift in BoE monetary policy. However, it may be difficult for GBP/USD to carve any significantly higher peaks because US inflation is also set to spike this week.
The US CPI figure for January is expected to hit a new four-year high of 2.4%, which could easily persuade the already-hawkish Federal Reserve to initiate the next phase of its hiking cycle fairly soon. The Fed currently expects to raise rates three times in 2017, but if price pressures continue to surge then the ‘Greenback’ could appreciate as investors up their 2017 Fed hike bets.
Canadian Dollar
The Pound to Canadian Dollar exchange rate flatlined yesterday. Sterling initially got off to a good start across the board, but GBP/CAD’s gains were erased later in the day as Canadian Prime Minister Justin Trudeau met with US President Donald Trump. The meeting between the two North American leaders passed without conflict and this was taken as a positive signal for the ‘Loonie’. Trump and Trudeau vowed to ‘co-ordinate closely to protect jobs… and keep wealth’ in their continent.
Australian Dollar
Sterling strengthened by around 150 pips versus the Australian Dollar yesterday as traders geared up for this morning’s UK CPI report. The prospect of further rate hikes in the US, which could tighten global borrowing conditions and therefore reduce investments in the perceived riskier ‘Aussie’ Dollar, also weighed on the Antipodean currency.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate completed a fairly comprehensive day of gains for the UK currency yesterday ahead of today’s British inflation report. If the UK CPI disappoints, however, we could see Sterling give back some of its recent gains.
Data Released
15:00 USD Fed’s Yellen Appears Before Senate Banking Panel High
10:00 EUR Euro-Zone Gross Domestic Product s.a. (YoY) (4Q P) High 1.8%
10:00 EUR German ZEW Survey (Economic Sentiment) (FEB) High 16.6
09:30 GBP Consumer Price Index (YoY) (JAN) High 1.9%