Sterling
Demand for Sterling remained soft on Friday as traders continued fretting over the potential consequences of Britain’s imminent exit from the European Union. The -15%-20% drop in the Pound since the referendum vote is starting to push up import costs, which is leading to price rises for consumers. Sadly, wage growth is not showing signs of growing so rapidly and as a result household purchasing power is likely to take a significant hit over the next 12 months. And because consumer markets have been one of the main drivers behind sanguine growth figures since the Brexit vote, analysts fear that overall economic output could suffer as a result of the expected downturn in consumer spending.
Data on the day showed that manufacturing output contracted -0.9% in January, disappointing forecasts of a slightly milder -0.7% fall, while industrial production declined by -0.4%, compared to estimates of -0.5%. The underwhelming reports did nothing to inspire investors to purchase Sterling but the monthly figures did not have a massive negative influence on sentiment. Indeed, later on in the day a report from National Institute of Economic and Social Research (NIESR) indicated that the UK economy grew by around 0.6% in the three months to February.
Euro
The Pound to Euro exchange rate slumped to a new seven-week low on Friday following comments from European Central Bank President Mario Draghi.
Sterling slid by around a cent as traders reacted to news that the ECB had discussed raising interest rates before fully winding down its quantitative easing programme. The ECB plans to continue purchasing Eurozone bonds until at least December of this year and it was thought that any rate rises would have to wait until after the QE programme was terminated. This remains the base case scenario, however, reports surfaced last week suggesting that some policymakers had put forward the idea that rates could rise earlier to combat the recent surge in inflation – Eurozone CPI recently struck a four-year high of 2.0% and could well rise further in future months.
The fact that GBP/EUR lost ground on the mere talk of such a move suggests that there could be further for Sterling to fall against the single currency over the coming weeks and months.
US Dollar
In economics, as in politics or sports, nothing is certain. However, certainty is a word being thrown around a lot by analysts regarding the probability that the Federal Reserve will rise interest rates 25 basis points this month.
Fed rate hike bets surged at the beginning of March as policymakers spoke of tightening policy and Chairwoman Janet Yellen said borrowing costs would likely rise if the US economy evolved as expected. Labour data on Friday showed that 235,000 new jobs were created in February, which outpaced estimates and was seen as a clear sign that the world’s largest economy is evolving as expected.
The robust non-farm payroll report was accompanied by a low unemployment rate score of 4.7% and an encouraging wage growth figure of 2.8%, however, the ‘Greenback’ failed to climb following the releases. This reflects the so-called certainty – even before the NFP report – among traders that the Fed will hike in March.
Investors will now look to future policy decisions to dictate US Dollar direction; a total of three 25 basis point hikes are expected in 2017.
Canadian Dollar
Sterling tumbled by around half a cent against the Canadian Dollar on Friday following an impressive Canadian labour market report.
Canadian unemployment slid unexpectedly from 6.8% to a two-year low of 6.6% in February thanks to a surprise 15,300 surge in job creation. The data was especially encouraging for the North American economy because it featured a huge turnaround in employment status, with 105,100 new full-time positions created to replace -89,800 part-time positions.
Australian Dollar
The Pound to Australian Dollar exchange rate lost out on around -70 pips on Friday despite the hawkish implications of the latest US non-farm payrolls report. The Fed looks almost certain to raise rates later this month following the robust labour report, however, the muted market reaction shows that a March hike has already been priced into most currency pairs, GBP/AUD included.
New Zealand Dollar
Sterling slid from a three-month high versus the New Zealand Dollar at the end of last week’s session, depreciating by around a cent as traders overlooked the upbeat US NFP report.
Data Released
13:30 EUR ECB President Mario Draghi Speaks in Frankfurt High