Sterling
Sterling lost out against the majors yesterday, even though UK inflation printed higher-than-anticipated.
Data showed that CPI rose from 2.3% to a fresh three-and-a-half-year high of 2.7% in April. Sterling’s post-Brexit depreciation, which ramped up import costs for producers, was the main driver behind the rise in price pressures. Surging energy costs due to the recent rebound in crude oil also played a part.
Ordinarily, a three-year high CPI print would have investors racing to purchase the Pound, in anticipation of higher interest rates from the Bank of England. However, just last week the central bank indicated that it was happy to look through above-target CPI while Britain’s post-Brexit trade relationship with the EU remains mired in uncertainty. Having said that, if inflation continues soaring during the remainder of the year, it is entirely likely that policymakers at the central bank could start voting for higher rates.
Euro
The Pound to Euro exchange rate tumbled by almost a cent yesterday as markets bet that rising price pressures would impact UK consumer spending patterns, and therefore domestic growth, but concluded that higher UK interest rates were still a long way off.
Another factor that could have played into the single currency’s hands was a ruling from the European Court of Justice (ECJ) that an EU trade deal agreed with Singapore in 2014 cannot take effect until ratified by over 30 (including the UK) national and regional parliaments across the 28-nation bloc. The ruling suggests that Britain may also have to receive full legislative consent before it can benefit from a post-Brexit free trade deal with the EU. This could impact Britain’s ability to forge a positive deal, as it would only take one veto from a regional or national assembly to derail any potential agreement.
US Dollar
‘Cable’ managed to avoid any lasting losses yesterday as traders treated the US Dollar with care following another scandal involving US President Donald Trump and Russia.
US officials announced on Monday that Trump disclosed highly classified information to Russia’s foreign minister Sergei Lavrov in the Oval Office in a recent meeting. The White House denied the allegations but the furor created added to concerns that the controversial President may not last long enough to implement his proposed bullish spending plans and tax cuts. Even if Trump’s position does not become untenable, it will be difficult for him to push through the major reforms if he remains in the spotlight for the wrong reasons.
Data in the US showed that industrial production outpaced expectations of 0.4% with a 1.0% expansion in April. But sentiment was soured by a 2.6% drop in housing starts, which underwhelmed hopes of a 3.7% gain.
Canadian Dollar
Sterling drifted slightly lower versus the Canadian Dollar yesterday ahead of UK labour data, which is tipped to show that unemployment remained at a multi-year low of 4.7% in March but that wage growth remained relatively soft, at 2.4%.
Prior to the global financial crisis in 2008 British wage growth fluctuated between 4%-6% for around three years, but since the crash UK earnings have rarely managed to keep up with the pace of inflation. This damaging trend looks set to resume through 2017, which explains why the Pound is struggling to garner support following yesterday’s three-and-a-half-year high CPI print.
Australian Dollar
The Pound to Australian Dollar exchange rate traded flatly for most of yesterday’s session as a neutral Reserve Bank of Australia policy statement did little to bolster rate hike expectations down under. The RBA noted that ‘maintaining the current accommodative stance of monetary policy would be consistent with achieving sustainable growth and inflation target over time’. The central bank forecast that core inflation would hit around 2% in 2018, suggesting that there was no hurry to tighten policy anytime soon.
New Zealand Dollar
Sterling managed to steal a half-cent daily gain against the New Zealand Dollar yesterday, despite dairy prices rising 3.2% at the latest GlobalDairyTrade auction. The result marked the fifth consecutive increase at auction, which would normally be considered a bullish signal for the ‘Kiwi’ because dairy is New Zealand’s largest export, but things did not work out that way on this occasion.
Data Released
09:30 GBP Average Weekly Earnings (3M/YoY) (MAR) Medium 2.4%
09:30 GBP ILO Unemployment Rate (3M) (MAR) Medium 4.7%
10:00 EUR Euro-Zone Consumer Price Index (YoY) (APR F) Medium 1.9%