What Drove Pound Sterling (GBP) Rates to Slump then Rebound Yesterday?
Brexit volatility gripped currency markets yesterday with Sterling initially plummeting on a perceived negotiating deadlock, and then bouncing back due to speculation that the EU could be prepared to offer Britain a two-year transition deal soon.
This sentiment yo-yo impacted all Sterling pairs and pretty much blew most other events out of the water. If EU leaders follow through on the rumours and offer Britain a ‘grace period’ to adjust to life outside of the economic bloc then it could lead to further gains for the Pound.
If a two-year transition period were to be agreed soon it would remove much of the uncertainty that is baked into the Sterling exchange rate and alleviate fears of a potentially catastrophic ‘no deal’ scenario.
Rollercoaster Day for GBP/EUR Leaves Sterling 50 Pips Higher
The Pound to Euro exchange rate could rally again today if EU chief negotiator Michel Barnier offers Britain the chance to stay in the EU single market and customs union during a two-year transition period, in exchange for the UK settling its financial obligations and securing the rights of EU citzens.
German newspaper Handelsblatt reported yesterday that Barnier is considering an offer of this kind, and the news sent Sterling surging versus the single currency.
GBP/EUR jumped 150 pips following the report, having initially tumbled -100 pips earlier in the day in response to remarks from Barnier suggesting Brexit talks had hit a ‘deadlock’.
The Euro could also have lost a little bit of ground yesterday afternoon in response to dovish comments from European Central Bank President Mario Draghi, who said that the bank’s pledge to maintain rock-bottom interest rates ‘well past’ the end of its QE programme was very important for anchoring rate expectations. The comments suggest the ECB may continue to use that line in future policy communications.
Strong US Inflation Print Could Send GBP/USD Reeling
The Pound managed to rebound against the US Dollar yesterday evening but Sterling’s luck could run out this afternoon if strong US inflation figures lead to a run of new Federal Reserve rate hike bets.
US CPI is predicted to have risen from 1.9% to 2.3% in September, which, alongside last week’s robust September wage figures, could easily cement December rate hike expectations. US retail sales are also projected to impress with a score of 1.7%, up from -0.2% previously. If the US data stream meets market forecasts then it could lead to depreciations in GBP/USD.
Pound to Canadian Dollar Exchange Rate on Track for Losses If US Inflation Rises
A neutral day for oil markets left the Pound to Canadian Dollar exchange rate at the whim of broader Brexit sentiment. GBP/CAD initially lost out on around -120 pips before registering a sharp 170 pip turnaround to finish the day half a cent higher than where it began. In the absence of any significant Canadian ecostats today, we could see the ‘Loonie’ stutter if the US CPI inflation report comes in strongly and US interest rate hike bets increase.
More Pound to Australian Dollar Exchange Rate Gains Likely
An upbeat assessment on the path of Australian inflation helped the ‘Aussie’ Dollar start strongly versus Sterling yesterday. However, the consumer inflation expectations score of 4.3% appears slightly optimistic and a likely lower CPI path could prove troublesome for the Australian Dollar later down the line. Bearish ‘Aussie’ outlook suggests GBP/AUD could push higher over the coming weeks.
Could Pound to New Zealand Dollar Exchange Rate Hit New 5-Month Highs Next Week?
Profit-taking took GBP/NZD lower by around -80 pips yesterday. However, rising Fed rate hike expectations and positive Brexit news could give the Pound the impetus to mount a rally towards new five-month highs over the next week.
Data Released Today
13:30 USD Consumer Price Index (YoY) (SEP)
13:30 USD Advance Retail Sales (SEP)
15:00 USD U. of Michigan Confidence (OCT P)