Sterling
The plot thickens…
Sterling surged last week when three Bank of England policymakers voted for higher interest rates, but demand for Sterling slumped on Tuesday when BoE Governor Mark Carney argued against raising rates anytime soon. Following the Governor’s speech investors felt the discussion was settled: no rate hike this year. That was until BoE chief economist Andy Haldane weighed in yesterday, intimating that he was ready to vote for higher borrowing costs soon.
‘Provided the data are still on track. I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year’, said Haldane. The Pound roared back into life on the currency markets after the speech, which breathed life into rate hike bets. Markets are currently pricing in around a 50⁄50 chance that monetary policy will be tightened in 2017.
Euro
The Pound to Euro exchange rate rallied by around half a cent yesterday as markets responded positively to BoE policymaker Andy Haldane’s hawkish speech.
Haldane’s comments on the need to raise interest rates at the appropriate time, which he suggested could be later this year, puts him at odds with Governor Mark Carney. The hawkish remarks were all the more significant because Haldane was previously considered one of the most dovish members of the monetary policy committee. However, it must be said that even with Haldane’s vote, at this stage, the hawks would likely be outvoted 5-3 because hike voter Kristin Forbes is leaving this month, to be replaced by likely dove Silvana Tenreyro. It seems the BoE is sticking to its delicate balancing act: hawkish sentiments to boost the Pound and prevent inflation getting out of control, while maintaining ultra-loose policy to foster lending and boost business investment.
US Dollar
‘Cable’ tallied up half a cent of gains yesterday as Haldane’s hawkish speech overshadowed the Queen’s Speech.
Prime Minister Theresa May’s compromised position was highlighted yesterday by a Queen’s Speech largely devoid of the PM’s own policies. Concepts that proved unpopular in this month’s general election, such as: a tough Brexit negotiation stance, the so-called dementia tax, and legalising fox hunting, were absent from the statement, which largely focussed on listening more closely to businesses and other parties’ Brexit concerns.
Although the shift to a softer Brexit approach should theoretically support Sterling in the long run, May’s minority government, which still hasn’t secured the support it needs from the Northern Irish Democratic Unionist Party (DUP), looks unstable and could be given the vote of no-confidence when parliament convenes to approve the Queen’s Speech next Thursday. Multifaceted political and economic uncertainty means that the Pound has struggled to sustain any meaningful gains against the US Dollar of late.
Canadian Dollar
Sterling strengthened by around a cent yesterday, rebounding from a two-month low against the Canadian Dollar.
GBP/CAD was boosted by the increasing prospect of a BoE rate hike this year, with markets pricing a greater than 50% chance of the UK central bank tightening policy in 2017. The commodity-sensitive ‘Loonie’ gained a little bit of momentum during the afternoon, when oil prices jumped on news of a 2.5 million drawdown in US crude inventories. However, it was Sterling that came out on top over the day.
Australian Dollar
The Pound to Australian Dollar exchange rate jumped 120 pips yesterday to recover from a two-month low as BoE rate hike bets soared. The Queen’s Speech barely impacted Sterling pairs, however, we could see a stronger reaction next Thursday when lawmakers vote on the government’s new agenda. If Theresa May doesn’t gain the necessary number of votes to pass the deal then Britain will be forced into another general election.
New Zealand Dollar
Sterling strengthened by around a cent against the New Zealand Dollar yesterday morning as hawkish BoE sentiment lent the UK currency a leg-up.
GBP/NZD’s gains, however, were halved later in the evening following the Reserve Bank of New Zealand’s decision to leave rates on hold at 1.75% in June. The RBNZ mentioned that a softer domestic currency would help rebalance the economy, but Governor Graeme Wheeler did not stress this point as much as expected, which led to a mild bout of ‘Kiwi’ Dollar buying.
Data Released
11:00 GBP CBI Trends Total Orders (Jun) Medium 7
13:30 CAD Retail Sales (MoM) (Apr) Medium 0.3%
15:00 EUR Euro-Zone Consumer Confidence (Jun A) Medium -3