Sterling
For the second day in a row, Sterling was subject to marked volatility around 6AM yesterday morning. Having tumbled on Tuesday morning, the Pound surged on Wednesday morning, with some analysts attributing the spike in demand to speculation suggesting the Bank of England could start raising interest rates much sooner than anticipated.
Indeed, a report in The Times showed that its team of economists believe rates should be hiked 25 basis points either this month or next to address the recent jump in the consumer price index. The BoE is due to release its policy decision for March at midday, however, most analysts are predicting a hold at 0.25%. It will be interesting to see if the bank does mention the rising rate of inflation and we could see Sterling appreciate if the prospect of a near-term rate hike is seen to increase.
Euro
The Pound recovered from a two-month low against the Euro yesterday as hawkish BoE rumours appeared to bolster Sterling sentiment. However, demand for the single currency improved during the evening when early exit polls suggested that Dutch Prime Minister Mark Rutte had taken a big lead over anti-Islamist, anti-EU far-right challenger Geert Wilders.
UK data showed that Britain’s unemployment rate fell to a 41-year low of 4.7% in January, meaning there are now a record high 31.854 million jobs in the UK economy. The positive headline reading beat forecasts, however, an unexpectedly sharp drop in average earnings tempered sentiment. Wage growth dipped from 2.6% to 2.2%, which is worrying considering that UK CPI hit a two-year high of 1.8% in January and looks set to rise further over the next few months.
Speaking of price pressures, Eurozone inflation struck a four-year high of 2.0% in February and that figure is expected to be confirmed later this morning, which could be taken as a bullish signal for the single currency. The European Central Bank aims for inflation of close to, but just below, 2.0%. So, the current CPI is actually above target but policymakers are unlikely to act hastily with an instant hike.
US Dollar
The Federal Reserve hiked rates, as expected, by 25 basis points yesterday evening amid sturdy economic growth, strong jobs gains and rising inflation.
However, the US Dollar actually slid against Sterling following the announcement due to the fact that the decision was widely telegraphed beforehand and the US central bank stuck to its schedule of predicting another two rate rises this year, in a ‘gradual’ fashion.
Meanwhile, US data saw inflation in America rise from 2.5% to 2.7%, its highest level since March 2012 and certainly supportive of higher borrowing costs. US retail sales printed at 0.1% in February, following an upwardly revised score of 0.6% in January.
Canadian Dollar
Sterling recovered from a two-week low against the Canadian Dollar yesterday morning as UK unemployment hit its lowest level since 1975. But demand for the risk-sensitive ‘Loonie’ increased during the evening as bets of an aggressive wave of Fed tightening were banished by a moderate statement from Chairwoman Janet Yellen.
Australian Dollar
Last night saw Australian unemployment disappoint, at 5.9% compared to calls for 5.7%. But it was not enough to give GBP/AUD much of a lift, with Sterling already trading at its lowest level for around four months after the Fed’s decision to predict just two more rate rises in 2017.
New Zealand Dollar
Improved global risk sentiment boosted the New Zealand Dollar last night and allowed the ‘Kiwi’ to register gains against Sterling even though a domestic report showed that New Zealand GDP growth halved from 0.8% to 0.4% in the fourth quarter, underwhelming expectations of 0.7%. On an annual basis, gross domestic product slowed from 3.3% to 2.7%.
Data Released
10:00 EUR Euro-Zone Consumer Price Index (YoY) (FEB F) Medium 2.0%
12:00 GBP BOE Asset Purchase Target (MAR) High 435b
12:00 GBP BOE Asset Purchase Target (MAR) High 435b