Volatility in the financial markets likely to increase today
19/Jan/2016 • Currency Updates•
The quiet start to the week is set to be short-lived, with a string of significant announcements this morning, including a speech from Bank of England Governor Mark Carney, likely to increase volatility among the major currencies.
Throughout much of yesterday the major currencies traded within a narrow band. A bank holiday in the US contributed to the quiet day in terms of announcements and data releases among the world’s main economies.
Oil prices fell to a fresh 12-year low below $28 a barrel on Monday. Commodity-driven currencies have sold-off across the board in the past few months, with many, including the Russian Ruble, Norwegian Krone and Canadian Dollar all trading around multi-year or even record lows against the US Dollar. The multi-year lows suggest good buying opportunities across these commodity-driven currencies.
Focus today will be on the latest inflation figures from both sides of the Channel. UK inflation, a measure watched keenly by the BoE when deciding on interest rates, will be announced this morning. Consumer price growth is expected to exceed 0.1% on an annualised basis for the first time in 11 months, with any positive surprises likely to provide good support for Sterling today.
Sentiment for the Pound, however, remains weak. The currency has so far been unable to pull clear of five-and-a-half-year lows against the US Dollar. That being said, this is not necessarily a negative for the UK’s exporters. Those with foreign currency income, especially USD, will be benefitting from the current exchange rates.
Inflation figures in the Eurozone today could provide an early indication as to the effectiveness of the European Central Bank’s modest increase in monetary easing measures in December.
Major currencies in detail:
The Pound continued to remain under pressure against its peers yesterday, with declining hopes of a 2016 BoE rate hike and concerns surrounding Britain’s EU referendum preventing any meaningful gains for the currency. Sterling ended 0.1% higher versus the US Dollar.
Recent uncertainty surrounding Britain’s future in the European Union has done little to help the Pound of late, which has skidded almost 10% against the US Dollar over the past six months.
Option market pricing now suggests that investors are increasing bets that an EU membership vote will take place at some point in the next six to nine months. This has concerned holders of Sterling, especially given recent estimates suggesting a ‘Brexit’ could shave as much as 1.5% of UK GDP and in turn limit the BoE’s ability to raise interest rates.
In terms of economic data, house prices, according to Rightmove, suggested a lack of price pressure in the housing market. Prices rose by just 0.5% over the Christmas period, despite an increase in demand.
A lack of announcements in the Eurozone kept movement in the single currency low on Monday, with the Euro ending unchanged versus the US Dollar during the London session.
The Euro has proved resilient so far this year, remaining within the 1.07-1.11 range since the ECB’s underwhelming monetary easing announcement at the beginning of December. The currency’s ability to hold its own against the US Dollar amid a divergence in monetary policy will depend heavily on the short-term decision-making of the ECB, which begins its two-day meeting on Wednesday.
We don’t expect any significant announcements or a change in policy from the Governing Council this week. However, we see a good chance easing measures will be expanded further at some point in the first half of the year, provided inflation remains at its currently subdued level.
The US Dollar was barely moved on Monday, ending just 0.1% higher against its major peers.
There were no economic releases or announcements in the US whatsoever on Monday due to a national holiday for Martin Luther King Day. Investors instead await significant economic releases later in the week.
Inflation figures on Wednesday will be the last major data release in the US before the Federal Reserve’s monetary policy meeting next week. Traders await clues with regards to the next interest rate hike in the US after the Federal Open Market Committee last month indicated that the US central bank could hike either three or four times this year.
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