Sterling rebounds on stock market rise, businesses await Bank of England meeting
12/Apr/2016 • Currency Updates•
The Pound bounced back strongly across the board on Monday. This was due to a rise in European stock markets and an unwinding of short Sterling positions following its recent sharp sell-off. At one stage, the Pound was up over 1% against both the US Dollar and Euro.
Focus for Sterling traders this week will undoubtedly be on this Thursday’s Bank of England meeting. With just three weeks since the central bank’s last meeting in March, new information from UK policymakers may be fairly limited.
Investors will look to the BoE’s minutes for indications on the possibility of persistently low inflation, downside risks from Brexit uncertainty and falling wage pressure. There remains a slim chance that one of the more dovish members, Haldane or Vlighe, could vote in favour of a cut, although we firmly expect the vote to remain unchanged at 9-0.
The latest inflation figures in the UK took centre stage this morning. Headline consumer price growth exceeded expectations, rising to 0.5%, its highest level since late-2014.
Renewed risk appetite following Monday’s stock market rebound and a warning from Japanese officials on currency intervention sent the Japanese Yen lower yesterday afternoon. This provided some support for the US Dollar, which suffered another day of losses against the Euro, despite limited economic data across both sides of the Pond.
US Dollar traders are looking to more significant economic data later in the week to provide clues regarding the health of the US economy and the likely timing of interest rate increases.
For the Euro, upcoming economic data releases present downside risks ahead of next week’s European Central Bank meeting.
Among the other G10 currencies, the New Zealand and Australian Dollar’s both strengthened following a rebound in commodity prices, while the Brazilian Real and South African Rand both continued their recent strong performance, appreciating by nearly 2% against the US Dollar.
With all of this uncertainty and the volatile economic climate globally, we see many UK companies locking in exchange rates now so that they can budget for the forthcoming financial periods accordingly. Amid Brexit concerns, businesses that use US Dollars to purchase goods and generate income in Euros, in particular, are hedging their cross-currency exposure.
Major currencies in detail:
Sterling ended the London trading session 0.85% higher against the US Dollar and 0.8% up versus the Euro on Monday, buoyed by an improved risk appetite.
Despite yesterday’s rally, the Pound remains around its weakest position in trade-weighted terms in more than two years ahead of the official start of campaigning for June’s EU referendum on Friday.
Earlier in the day, the British Chambers of Commerce warned that the UK economy lost steam in the first three months of the year, with slowing domestic demand weighing on both the services and manufacturing sectors. According to the survey, domestic sales growth for manufacturers slowed to the lowest level in over three years, and for services to its weakest level since mid-2013.
Today’s inflation figures will be released this morning. Both headline and core figures are expected to increase on a month previous, which could provide some support for Sterling on Tuesday.
The Euro rallied by 0.1% against the US Dollar, remaining mostly range-bound again following the currency’s sharp appreciation last month.
Monday proved to be a quiet start to the week in the Eurozone economy as investors awaited more meaningful announcements later in the week. Industrial production in Italy was little moved, falling by 0.6% in the month to February. This doesn’t bode particularly well for Euro-wide industrial output data later in the week.
Attention in the Eurozone will turn to this morning’s inflation data in Germany, with price growth expected to remain unrevised at a lowly 0.3% on the year to March.
Industrial production data on Wednesday and inflation figures on Thursday both present downside risks for the single currency this week ahead of next week’s monetary policy meeting from the ECB.
Amid a lack of economic data or announcements, the US Dollar index fell modestly by 0.2% on Monday.
The US Secretary of the Treasury Jacob Lew and FOMC member William Dudley both spoke yesterday, although disappointed traders by failing to touch on monetary policy.
Mostly second-tier economic data in the US today, with import and export prices at 13:30 UK time the highlight. A speech from Fed member John Williams this evening will also be worth noting.
US Dollar traders are looking to more significant economic data later in the week to provide clues regarding the health of the US economy. Retail sales figures on Wednesday and inflation data on Thursday could both prove market movers in the US this week.
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