Sterling
Profit taking helped Sterling recover a little bit of ground yesterday, while a four-year high inflation print also lent support to the Pound.
Beating expectations of 2.7%, UK CPI jumped to a four-year high of 2.9% in May. The Pound’s significant depreciation since last year’s Brexit referendum was partly to blame for the figure, with higher import costs driving consumer prices higher. Recreational and cultural services exerted the largest upward push to the figure, while food, clothing and furniture prices also featured prominently.
Analysts noted that, while the Bank of England was unlikely to rock the boat with higher interest rates anytime soon, the BoE would probably see the inflation result as a sign that further monetary easing was not necessary.
Euro
Sterling rallied by around 80 pips versus the Euro yesterday as traders cashed in on the post-election GBP/EUR crash, which took the Pound lower by almost three cents to a seven-month low.
A surprisingly steep rise in UK consumer prices in May, which took British inflation above the BoE’s projected peak of 2.8%, reminded markets that the UK could be headed for another cost of living crisis. Inflation is now outstripping wage growth, which is liable to weigh on economic growth – especially considering that consumer spending is a pillar of the British economy.
Although the onset of falling real wages presents clear concerns, the CPI figures also underscore the importance of propping up the domestic currency. The BoE has no plans to tighten policy anytime soon – this could risk further deterioration in business investment – but policymakers may be forced into a rethink if the weakened Pound continues dragging domestic prices lower.
US Dollar
The Pound to US Dollar exchange rate strengthened by around a cent yesterday as profit taking and higher inflation drove Sterling higher.
Regarding GBP/USD, there are a number of key announcements to keep an eye on today. First we have the UK unemployment report, which is tipped to see joblessness remain at 4.6% and average earnings hold steady at 2.4%. It would take an almighty jump in wages to boost the Pound, while any unexpected dips in earnings could have a more acute downward impact.
The second major print is the US inflation report, which is likely to show CPI somewhere in the region of 2.0%, and the third is anticipated to see US retail sales come in at 0.1%. Neither result is likely to have much bearing on the fourth and most significant event of the day: the Federal Reserve policy announcement. The Fed is widely expected to raise interest rates by 25 basis points, which, alone, is unlikely to be enough to bolster the appeal of the ‘Greenback’.
To send the US Dollar higher, speculative investors are looking for a hawkish hike, with a nod towards additional rate increases later in the year.
Canadian Dollar
Sterling traded flatly against the Canadian Dollar yesterday as profit taking boosted the Pound and Bank of Canada rate hike bets supported the ‘Loonie’.
BoC Governor Stephen Poloz intimated that interest rate cuts in 2015 have largely done their job, opening the door to a future bout of monetary tightening. Rate hike bets surged from 22% on Friday to 72% yesterday, reflecting the hawkish shift at the Canadian central bank.
Australian Dollar
The Pound to Australian Dollar exchange rate appreciated by around 130 pips yesterday as markets locked in profit from multi-month lows in Sterling.
New Zealand Dollar
The Pound rose by over a cent against the New Zealand Dollar yesterday, propped up by a deluge of profit taking stances and a higher-than-anticipated UK CPI report. Data due for release this evening is tipped to show that New Zealand GDP jumped from 0.4% to 0.7% in the first quarter, which could drive GBP/NZD lower late in the day.
Data Released
09:30 GBP Average Weekly Earnings (3M/YoY) (APR) Medium 2.4%
09:30 GBP ILO Unemployment Rate (3M) (APR) Medium 4.6%
10:00 EUR Eurozone Industrial Production w.d.a. (YoY) (APR) Medium 1.4%
13:30 USD Consumer Price Index (YoY) (MAY) High 2.0%
13:30 USD Advance Retail Sales (MAY) High 0.1%
19:00 USD Federal Open Market Committee Rate Decision – Upper Bound (JUN 14) High 1.25%
19:00 USD Federal Open Market Committee Rate Decision – Lower Bound (JUN 14) High 1.00%
23:45 NZD Gross Domestic Product (QoQ) (1Q) Medium 0.7%