Sterling
The Pound powered ahead on Friday as investors reacted positively to a mixed bag of domestic data. The latest UK GDP confirmed quarterly growth of 0.7% in the final three months of 2016, as expected. But the annualised GDP score was revised down from 2.0% to 1.9%.
Some analysts noted that a drop in the savings rate, from 5.3% in Q3 to an all-time low of 3.3% in Q4, was a sign that consumers are feeling the squeeze of higher prices and flat wage growth. Data released earlier in the week showing that UK credit card borrowing recently hit an 11-year high appears to corroborate that claim.
However, on this occasion currency traders overlooked the potential for a breakdown in consumer spending and focussed on the positive elements of the GDP report. Namely: a fall in Britain’s trade deficit. Much of the selling around the Brexit referendum was centred on a fear that Britain’s large current account deficit could spiral out of control if political and economic instability deterred traders from investing in UK government debt.
Optimistically, however, Friday’s report showed that the deficit shrank from -£25.7 billion in Q3 to -£12.1 billion in Q4. This brought the current account deficit to just 2.4% of GDP – its lowest level since 2011. The positive movement suggests that Sterling’s 15%-20% post-Brexit depreciation has persuaded investors to take advantage of the cheap currency to invest heavily in the British economy.
Euro
The Pound to Euro exchange rate rallied by around a cent on Friday to strike a monthly high as surprisingly upbeat UK current account numbers bolstered the appeal of the Pound and a softer-than-anticipated Eurozone CPI report weighed on the single currency.
Following a slowdown in German inflation, the currency bloc’s consumer price index dropped from 2.0% to 1.5% in March. Traders had been primed for a milder dip to 1.8%, and subsequently the Euro faced a little bit of selling pressure after the announcement. The cooling of CPI gives European Central Bank President Mario Draghi some breathing space on monetary policy and will likely prevent any near-term rate rises or QE reductions.
US Dollar
‘Cable’ broke above longstanding psychological and technical resistance on Friday, appreciating by around 75 pips following optimistic current account data.
A surprise drop in Britain’s account deficit was interpreted by some traders as a sign that the Pound’s massive depreciation in the second half of last year was enough to insulate the uncertainty of Brexit. This helped drive Sterling higher in the morning and the Pound’s rise accelerated in the afternoon as markets sought to settle quarter end trading requirements.
We could see GBP/USD appreciate further over the coming months if Sterling manages to do what it hasn’t been able to do since September: hold above strong technical resistance.
Canadian Dollar
The Canadian Dollar initially performed well on Friday against the Pound but Sterling won out by the end of the day.
The Canadian GDP report for January showed a doubling of monthly growth, from 0.3% to 0.6%, and a surprise jump in annualised growth, from 2.1% to 2.3%. GBP/CAD plummeted -120 pips in the minutes immediately after the release, however, the Pound pushed ahead later in the day as big moves in GBP/USD dragged Sterling higher.
Australian Dollar
The Pound to Australian Dollar exchange rate rose by around 150 pips on Friday as sanguine current account numbers bolstered UK sentiment and quarter end trading settlements led to a surge in Sterling buy orders.
Data in China showed that manufacturing output inched up from 51.6 to 51.8 in March but the ecostat was not enough to boost demand for the ‘Aussie’ Dollar on this occasion.
New Zealand Dollar
Sterling traded higher by around a cent against the New Zealand Dollar on Friday, potentially opening the door to future gains for GBP/NZD. If the Pound maintains its bullish momentum and manages to press ahead over the next few days, then we could see the Pound to New Zealand Dollar exchange rate hit highs not seen since September last year.
Data Released
09:30 GBP Markit UK PMI Manufacturing SA (MAR) Medium 55
10:00 EUR Euro-Zone Unemployment Rate (FEB) Medium 9.5%
15:00 USD ISM Manufacturing (MAR) High 57.1