Sterling
An historic day for Britain but not so much for the Pound yesterday as UK Prime Minister Theresa May formally began Britain’s divorce form the European Union. The Pound traded a little bit higher following the triggering of Article 50, however, Sterling’s gains were mild enough that future exchange rate moves are difficult to predict.
It seems that markets were cheered by the cordial tone of Theresa May’s letter of notification and the conciliatory nature of European Council President Donald Tusk’s response. The lack of divisiveness was seen to bode well for the arduous years of future trade talks, with Tusk even proclaiming ‘we already miss you’.
However, there are many contrasting theories regarding how investors will treat the Pound over the course of the Brexit negotiation period. Most analysts agree that Sterling could run into rough patches if / when trade talks start to fire up. Verbal volleys and unrealistic posturing are unlikely to go down well.
Some traders believe that there is still further for the Pound’s post-referendum fall to go. They posit that rising inflation mixed with stagnant wage growth and economic uncertainty will likely lead to softer GDP growth, reduced business investment and accommodative monetary policy.
Others reckon that domestic growth could remain sturdy over the next few years, with businesses opting to stockpile and consumers choosing to make purchases before prices potentially rise when the UK loses single market access. Remember, Britain retains EU membership rights for the next two years. Under this scenario of upbeat growth and spiking inflation, the Bank of England would likely raise rates and subsequently bolster the Pound.
Euro
The Pound to Euro exchange rate rallied by around a third of a cent yesterday as investors reacted warmly to the friendly language employed by UK and European leaders around the official notification that Britain is to leave the EU.
UK PM Theresa May accepted that there could be no ‘cherry picking’ of free trade without unrestricted movement of goods, services, capital and people, but said she was seeking a special partnership with the EU. In response German Chancellor Angela Merkel vowed to take a ‘fair and constructive’ approach to Brexit talks, while EC President Donald Tusk promised to minimise the cost of Brexit to citizens of the EU.
Today’s data is less historically significant but could have an equal impact on the GBP/EUR exchange rate. German CPI is tipped to have slowed from 1.1% to 1.8% in March, which could weigh on the single currency as it will likely preclude a dip in the wider Eurozone inflation index.
US Dollar
Sterling also registered a mild 30-pip gain versus the US Dollar yesterday but remained capped by significant technical and psychological resistance.
The ‘Greenback’ drew mild support during the afternoon from comments by Chicago Federal Reserve President Charles Evans suggesting that interest rates would be raised one or two times more later this year. The remarks didn’t give the US Dollar much of a boost, however, because the Fed, and indeed the markets, have been pricing in a total of three rate hikes (we already had one earlier this month) in 2017 for quite some time now.
This afternoon is anticipated to see US GDP for the fourth quarter come in at 2.0%, up slightly from previous estimates of 1.9%. This would represent a neutral print, but anything higher could boost the US Dollar and anything lower could weigh.
Canadian Dollar
The Pound depreciated by around a cent against the Canadian Dollar yesterday thanks to surging oil prices. Crude is Canada’s most lucrative export, which explains why demand for the ‘Loonie’ usually rises and falls in tandem with the ‘black gold’. Oil prices rallied by around 2% following news that US gasoline stockpiles dropped sharply last week, indicating that the global supply glut could finally be beginning to cool.
Australian Dollar
The Pound to Australian Dollar exchange rate lost out on around a cent yesterday as rising commodity prices boosted demand for commodity-correlated currencies such as the ‘Aussie’ Dollar. GBP/AUD was also impacted by profit-taking stances following a two-month high struck on Tuesday.
New Zealand Dollar
Completing a hat trick of losses for the Pound versus the commodity bloc, Sterling tumbled by around a cent against the New Zealand Dollar yesterday. GBP/NZD is around 36 cents worse off than before the Brexit vote last year, but the pair has not suffered any lasting losses since rebounding from an all-time low last September.
Data Released
13:30 USD Gross Domestic Product (Annualized) (4Q T) High 2.0%
13:00 EUR German Consumer Price Index (YoY) (MAR P) High 1.8%