Sterling
Sterling softened against most of the majors yesterday as markets reacted to surprisingly downbeat UK labour market figures.
The headline unemployment rate remained at a 42-year low of 4.6% but the average weekly earnings index, excluding bonuses, printed at 1.7% – significantly lower than market bets of 2.0%. Considering that UK inflation is running at a four-year high, the weak wage print bodes badly for UK economic prospects. On an annual basis real wage growth (wages minus inflation) fell to a three-year low of -0.6% in the three months to April. This is likely to weigh on consumer spending trends and subsequently hamper domestic growth.
Also exerting negative pressure on the Pound was political uncertainty, which was piqued by news that Theresa May had not yet managed to get the Democratic Unionist Party (DUP) to sign the deal she needs to form a government.
Euro
The Pound to Euro exchange rate drifted lower yesterday as British real wage growth succumbed to its lowest level in three years and prolonged government talks increased political uncertainty.
Later today the Bank of England is due to speak on monetary policy. Traders do not expect Governor Mark Carney and co. to announce any new policy measures, however, the recent political turmoil could prompt policymakers to discuss the possibility of additional easing in the future. This would likely drag Sterling lower against the single currency.
Overshooting inflation and record-low unemployment would ordinarily persuade the BoE to think about hiking interest rates, but the spectre of uncertainty associated with Brexit and a hung parliament mean that a hawkish message is quite unlikely at this juncture.
Data out of the Eurozone showed that industrial activity expanded 0.5% in the currency bloc in April. The upbeat report featured robust figures from Germany, but slightly less hot numbers from France and Italy.
US Dollar
It was a volatile day for ‘Cable’ yesterday. GBP/USD broke higher in the morning before tanking on the downbeat UK wage growth figures. Later in the afternoon, however, a soft set of American ecostats allowed Sterling to mount another rally versus the US Dollar. That rally then petered out during the evening following the Federal Reserve’s decision to hike rates and further normalise monetary policy.
The US consumer price index decelerated unexpectedly from 2.2% to 1.9%, while retail sales posted a surprise decline of -0.3%, down from +0.4% previously. Core US inflation struck its weakest level since May 2015, while the retail report saw the lowest headline figure since January 2016.
Demand for the ‘Greenback’ picked up again in the evening following the Fed’s decision to raise interest rates 25 basis points to a target rate of between 1.00%-1.25%. The US central bank said the economy was strengthening, job gains were solid and noted no concerns over the recent blip in inflation. The upbeat report suggested that underwhelming figures such as the CPI and retail report were not going to knock policymakers off their course of normalisation. The Fed also announced that it would begin winding back its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities that that were purchased as part of the bank’s QE scheme.
Canadian Dollar
The Pound was insulated from political or wage related losses against the Canadian Dollar yesterday because oil markets tumbled during the afternoon.
The price of crude, Canada’s largest export, tanked 3% when the US government reported an inventory drawdown of 1.7 million barrels, which was markedly less than the 2.7 million drop expected by investors. The softer-than-anticipated figure suggests weak demand in a market of oversupply, which could drive prices even lower in the future.
Australian Dollar
The Pound to Australian Dollar exchange rate plummeted lower by over a cent yesterday as negative real wage growth prompted concerns that the British economy could be headed for a significant slowdown at a time of profound political uncertainty.
The BoE is due to speak today but the bank’s options are limited: attempt to boost economic output through additional monetary easing and the Pound could depreciate further, thus boosting import costs and driving inflation even higher. Start hiking rates to counter rising inflation and the economy could grind to a halt as business investment slows due to uncertainty and increased borrowing costs. Quite a conundrum.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate tumbled by around a cent during the London session yesterday as downbeat domestic data compounded Sterling’s misery. During the evening GBP/NZD recovered slightly following news that New Zealand GDP increased 0.5% in the first quarter of the year, which undershot market forecasts of 0.7% and reduced Reserve Bank of New Zealand rate hike bets.
Data Released
09:30 GBP Retail Sales (YoY) (MAY) Medium 1.9%
12:00 GBP Bank of England Rate Decision (JUN 15) High 0.25%
12:00 GBP BOE Asset Purchase Target (JUN) High 435b
14:15 USD Industrial Production (MAY) Medium 0.2%
21:00 GBP BOE Governor Mark Carney Speaks at Mansion House in London High