Sterling hits fresh seven-year low, US consumer confidence plunges
24/Feb/2016 • Currency Updates•
Sterling was steady for most of Tuesday, although plunged towards the end of the session, touching a fresh seven-year low against the US Dollar. The Pound remains under heavy pressure following recent backing for the Brexit campaign from a number of senior Conservative MPs.
Speaking at the latest inflation report hearings at the House of Commons, Governor of the Bank of England Mark Carney calmed talk of negative interest rates in the UK by claiming the central bank had ‘no intention and no interest’ in adopting below zero rates.
Carney did, however, open the door to additional stimulus, if needed, which could include additional quantitative easing or a cut in the benchmark rate towards, but remaining above, zero. These actions would no doubt cause further downward pressure on Sterling, with short-term volatility likely.
The Pound looks set to remain under pressure right up to polling day on 23 June. Therefore many businesses with Sterling exposure are considering how to reduce their medium-term risk through risk management strategies, including hedging their exposure.
In the US, the latest consumer confidence data disappointed expectations for the month, cutting short a rally in the Greenback that saw the currency approach a three-week high against its major peers.
The Japanese Yen rallied again following a further decline in global stock markets, continuing to defy recent aggressive monetary easing from the Bank of Japan.
Comments from the Chairman of the Swiss National Bank, warning there were limits to how far rates could go, sent the Swiss Franc spiraling to a one-month high against the US Dollar.
Meanwhile, in emerging markets, the South African Rand touched to a two-month high ahead of a speech by the country’s Finance Minister today. The currency has continued to appreciate mostly in line with our out-of-consensus view for Rand strength following the excessive sell-off last year.
Major currencies in detail:
Some relatively dovish comments from Mark Carney and continued Brexit concerns caused the Pound to end 0.6% lower against the US Dollar.
Commenting alongside Carney at the inflation report hearing, Bank of England rate-setter Sharik said that she believed the next rate move would be up. She also stated that future rate increases should occur quicker than the existing yield curve would suggest, as is also our expectation.
Meanwhile, fellow MPC member Martin Weale suggested that a rise in Sterling last year held down inflation in the UK. Tightening labour market conditions should ensure headline price growth returns back to target over the medium term.
With no major economic data releases in the UK on Tuesday, attention will likely remain on expectations for this summer’s EU referendum.
The Euro continues to retrace following its recent excessive and mostly unwarranted appreciation against the US Dollar. The single currency finished the London trading session 0.2% down against the USD.
Economic data from Germany continues to paint a bleak picture of the European economy. The economy grew by a meagre 0.3% in the final quarter of last year, with a drop in exports and increasing imports continuing to hold back the German economy. The latest manufacturing figures, which barely showed an expansion this month, suggest that the economy will likely remain under pressure throughout the first quarter of 2016.
The latest German business sentiment indices from IFO released yesterday were also fairly disappointing. The closely watched business climate index fell to 105.7 from 107.3, piling more gloom on the outlook for Europe’s largest economy, following its recent slowdown.
The US Dollar was well supported on Tuesday, despite fairly mixed data, finishing 0.2% higher against its major counterparts.
Consumer confidence in the US plunged this month to its lowest level in seven months. The Conference Board’s monthly index slid to 92.2 as households grew more concerned about the outlook for the economy and labour market.
Worryingly, inflation expectations among households over the next 12 months eased to its lowest level since February 2007.
The Richmond Fed manufacturing survey also disappointed, falling into negative territory, at -4, for the first time in three months.
By contrast, we saw some encouraging news on the housing front. Existing home sales defied expectations of a decrease, increasing by 0.4% in the month to January.
Today will see mostly second-tier economic releases out of the US, with the services PMI at 14:45 UK time likely to draw the most attention this afternoon.
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