Pound Sterling Unscathed by Moody’s Credit Rating Downgrade
Over the weekend Moody’s cut the UK credit rating by one notch from Aa1 to Aa2, citing economic uncertainty related to Brexit, which could weaken Britain’s public finances and constrain growth. Currency traders were largely unresponsive to the move during Monday’s session, with most concluding that projections regarding Brexit had already been priced into the market valuation of Sterling.
For the most part, currency investors also overlooked a report from the Bank of England suggesting that consumer credit was getting worryingly high.
The Financial Policy Committee stated that consumer credit losses could hit £30 billion if Britain fell into a recession, and that 20% of consumer loans could have to be written off. However, the FPC noted that rapid growth in consumer credit did not pose a ‘material risk to economic growth’ as it only accounts for 11% of overall household debt.
German Election Result Weighs on Euro as Draghi Remains Cautious
The Pound to Euro exchange rate rallied by over half a cent yesterday as jittery traders pulled out of the single currency in reaction to the election results in Germany.
Chancellor Angela Merkel won a fourth term in office, albeit with her Christian Democratic Union party’s worst vote count since 1945. The centre-right CDU lost votes to the anti-immigration AfD, which took 88 seats to bring the far-right into the Bundestag for the first time since 1961.
The centre-left SPD also performed terribly, and has refused to enter a grand coalition, preferring instead to form the opposition. This has left Merkel needing the support of various minority parties, and creates a clouded political outlook. It could take weeks or even months for the Chancellor to form a working government and this political uncertainty has weighed on the Euro.
The single currency also suffered as the European Central Bank President signalled that ‘ample’ policy accommodation was still required, despite the view that Eurozone inflation was likely to return to the 2.0% target in the medium-term. The cautionary remarks were seen to put the brakes on the recent rise in expectations for a policy taper as early as this October.
Pound to US Dollar Exchange Rate Down Ahead of Fed Yellen Speech
The Pound performed less well versus the US Dollar, sliding half a cent as markets continued to lock-in profit from last week’s series of 14-month high GBP/USD peaks.
A war of words between US President Donald Trump and Pyongyang escalated further yesterday. Last week North Korean leader Kim Jong Un threatened to ‘surely and definitely tame the mentally deranged dotard [Donald Trump] with fire’ and North Korean foreign minister Ri Yong Ho stated yesterday that a tweet from Trump over the weekend declaring that Kim Jong Un ‘won’t be around for much longer’ amounted to a declaration of war.
Ri Yong Ho added that North Korea was prepared to shoot down US bombers, even if they did not enter the country’s airspace. The US Dollar weakened a little bit on the news versus the safe haven Japanese Yen, however, the fiery exchange did not appear to negatively impact the ‘Greenback’ versus the Pound.
During today’s session it’s worth keeping an eye out for Federal Reserve Chairwoman Janet Yellen’s speech on monetary policy. If Yellen drops more rate hike hints we could see GBP/USD move another step lower.
Pound to Canadian Dollar Exchange Rate Slips as Brent Crude Strikes 2-Year High
The Pound to Canadian Dollar exchange rate softened slightly yesterday as Brent crude oil struck a two-year high on news that major producers had largely stuck to their agreed output cuts. The news lifted the commodity-correlated ‘Loonie’ as oil is Canada’s most-lucrative export.
Pound to Australian Dollar Exchange Rate Steady
Sterling traded fairly steadily versus the Australian Dollar yesterday despite geopolitical concerns. The North Korean ‘war’ comments weighed on risk sentiment slightly, thus leading to a little bit of a pullback in demand for the high-beta ‘Aussie’. However, there was not a pronounced GBP/AUD move in either direction.
Pound to New Zealand Dollar Exchange Rate Down -100 Pips
The Pound to New Zealand Dollar exchange rate tumbled by around a cent yesterday as markets locked in profit following a series of GBP/NZD gains over the past fortnight. Indeed, Sterling is still around 300 pips higher against the ‘Kiwi’ than it was two weeks ago.
Data Released Today
15:00 USD Consumer Confidence (SEP)
17:45 USD Yellen Speaks on Inflation, Uncertainty and Monetary Policy