Sterling
It was reported yesterday that UK inflation remained at a three-year high of 2.3% in March. The Office for National Statistics (ONS) said that rises in food, alcohol, tobacco, clothing and footwear prices were offset by a drop in transport costs, most notably air fares. However, the timing of Easter (April this year, March last year) suggests that price pressures could ramp up again this month; in 2016 air fares jumped 22.9% during the Easter Holiday period. The Pound remained largely unchanged following the CPI announcement.
However, demand for Sterling surged during the afternoon in a puzzling move that did not coincide with any domestic news. Some analysts said that geopolitical concerns regarding the US, Russia, Syria and North Korea had spooked traders into investing in the Pound.
But it’s also possible that Sterling’s afternoon rally reflected optimism ahead of this morning’s UK labour market report, which is anticipated to see unemployment remain at 4.7% and average earnings hold steady at 2.2%. If the wage data shows a surprise jump then the Pound could hold onto these gains, if the earnings report disappoints then there is potential for profit-taking to kick in.
Euro
The Pound to Euro exchange rate rallied by around half a cent to strike a weekly high yesterday. UK inflation data printed in line with market expectations, at 2.3%, but that did not appear to drive demand for GBP/EUR. And neither did a 1.2% Eurozone industrial production print or a 19.5 German ZEW economic sentiment print.
The single currency appeared more sensitive to developments in the French Presidential race, where two out of the three favourites are planning to take France out of the European Union. With around 30% of voters undecided ahead of the vote, investors are waking up to the real possibility that the far-right, anti-EU Marine Le Pen could face far-left, anti-EU Jean-Luc Melenchon in the final round. This could send the Euro spiralling and push the Euro back into an existential crisis.
US Dollar
‘Cable’ strengthened by over half a cent yesterday afternoon as traders fretted over potentially incendiary comments from US politicians.
US President Donald Trump tweeted: ‘North Korea is looking for trouble. If China decides to help, that would be great. If not, we will solve the problem without them! U.S.A.’ Trump also suggested China would not get a preferential trade deal if it did not help quell North Korean aggression. Markets entered risk-off mode in response as jittery traders considered the potential for conflict escalation. Indeed, North Korea’s state-run newspaper said it had nuclear weapons aimed at US army bases and the US mainland, indicating the nation would respond to any further signs of aggression.
Risk sentiment was also dealt a blow by remarks from US Secretary of State Rex Tillerson, who urged Russia to abandon its support of Syrian President Bashar al-Assad.
Canadian Dollar
The Pound to Canadian Dollar exchange rate appreciated by around 80 pips yesterday as risk aversion trends took funds out of the ‘Loonie’. A perceived shift in US foreign policy, which saw American officials make a public warning to Russia, China and North Korea was seen to increase the probability of geopolitical conflicts and this softened investors’ appetite for riskier assets such as the commodity-sensitive Canadian Dollar.
This afternoon’s Bank of Canada interest rate announcement is expected to see Governor Stephen Poloz leave rates on hold at 0.50%.
Australian Dollar
Sterling struck a two-month high yesterday, rallying by around a cent as dampened risk sentiment drove investors out of the volatile ‘Aussie’ Dollar.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate strengthened by over a cent yesterday to hit its highest level since midway through December 2016. Risk aversion appeared to be the major driver behind the move in favour of GBP/NZD, however, there is potential for Sterling to press ahead again during today’s session if UK wage data impresses or Bank of England Governor Mark Carney uses a speech in London to discuss the possibility of hiking interest rates in response to rising inflation.
Data Released
09:30 GBP ILO Unemployment Rate (3M) (FEB) Medium 4.7%
09:30 GBP Average Weekly Earnings (3M/YoY) (FEB) Medium 2.2%
09:30 GBP BOE Governor Carney Speaks at Event in London High
15:00 CAD Bank of Canada Rate Decision (APR 12) High 0.50%
15:00 CAD Bank of Canada Releases April Monetary Policy Report High