The Pound has strengthened this morning following the release of stronger than expected UK inflation data with Core Consumer Prices rising at an annual pace of 1.2% adding weight to the argument that the Bank of England should consider increasing UK interest rates which have stood at their historic low of 0.50% for more than six years.
This follows recent comments from Bank of England Monetary Policy Committee member Kristin Forbes who argued that “Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect” and comments from MPC member David Miles who said there are arguments for “stating the journey now” towards a rate hike.
An increase in interest rates makes the associated currency more attractive as global investors seek yield in a global economy with historically low interest rates. Both the Federal Reserve in the US and the Bank of England in the UK are now expected to increase rates either late in 2015 or in 2016. Most expectations are for the Federal Reserve to increase rates before the Bank of England with the Bank of England more likely to raise rates in 2016.
The Pound increased to 1.5670 against the US Dollar (from 1.5598 before the inflation data) and increased to 1.4154 against the Euro (from 1.4085 before the inflation data).
The Pound has appreciated following better than expected UK earnings data as earnings increased by 2.7%. Moreover, minutes released by the Bank of England showed that the Bank was unanimous in voting to hold its interest rate at 0.50% and its asset purchase facility at £375bn. Notably the Bank is now expecting UK consumer prices to pick up pace by the end of the year. This has pushed the Pound through 1.57 against the US Dollar and through 1.39 against the Euro.
The Euro rebounded strongly yesterday 02nd June amid optimism that Greece is moving closer to reaching an agreement with its international creditors and reports that the European Central Bank increased the level of emergency cash available to Greek banks by €500m. Moreover, inflation data released from the Eurozone suggested that deflation risks have subsided as the Consumer Price Index (Core YoY) beat market expectations at 0.90%.
Today 03rd June, European Commission President Jean-Claude Junker is set to meet with Greek Prime Minister Alexis Tsipras and the European Central Bank will also meet to make its interest rate decision. It is expected the European Central Bank will hold its key interest rate at the record low of 0.50% whilst possibly accelerate their EUR60bn per month asset purchase program. The outcomes of both meetings will be watched closely by market participants.
Elsewhere we have a raft of data due out of the US this afternoon including mortgage approvals, employment data, trade balance and Purchasing Managers Index data. This evening the Federal Reserve will also release its Beige Book economic report.
As a result the Euro has spiked higher against the US Dollar and the Pound with EUR/USD hitting a high of 1.1193 and EUR/GBP pushing through 0.73p (GBP/EUR below 1.37). Elsewhere, GBP/USD has traded between 1.5375 and 1.5215.
UK financial markets rallied on Friday as election results pointed to an outright victory for the Conservative Party, wiping away the uncertainty of a hung parliament.
The Pound has rallied across the board and was up 2% against the Euro, pushing EUR/GBP down to 0.7226p (GBP/EUR 1.3839). This put sterling on course for its biggest one-day rise against the single currency since early 2009.
The Pound rose against the US Dollar hitting a high of 1.5521 before settling back to trade around 1.5450.
Whilst the short term risks of a hung parliament have diminished, longer term risks remain namely the proposed referendum on the UK remaining in the EU and the possibility of another Scottish independence referendum following the Scottish National Party’s victory in Scotland.
The European Central Bank (ECB) will start its new government bond-buying programme on 9th March hoping to boost growth and lift inflation in the ailing Eurozone. The ECB plans to spend €60bn a month on buying sovereign bonds and some private sector assets with the purchases likely to last until at least September 2016.
In the UK the Bank of England (BoE) kept rates unchanged, meaning they have now been at their record low of 0.50% for six years. Whist none of the leading economists polled by Reuters expect the Bank of England Monetary Policy Committee to raise rates before the UK general election in May, there are some expectations that the BoE may increase rates sooner than currently forecast by the markets meaning that the ECB and BoE could have diverging monetary policies, thus supporting the Pound further against the Euro.
The Euro (EUR) fell to its lowest level against the US Dollar (USD) in over 11 years hitting a low so far of 1.1008 on the interbank market. The Euro also fell against the Pound (GBP) with EUR/GBP hitting a low of 0.7224 (GBP/EUR high 1.3842).
The Euro has weakened across the board as European Central Bank (ECB) President Mario Draghi launched an expanded asset purchase program, committing to €60bn of private and public debt asset purchases every month from March 2015 to September 2016. The policy was larger than market expectations which predicted asset purchase totalling €50bn per month.
Following the announcement the Euro plunged to its lowest level in over 11 years against the US Dollar with EUR/USD trading as low as 1.1402. The Euro also fell against the Pound with EUR/GBP hitting a low of 0.7566 (GBP/EUR 1.3217). The Euro continues to trade around parity against the Swiss Franc trading today between 0.9846-1.0033.
The Pound has fallen following the release of the latest minutes from the Bank of England as all 9 Monetary Policy Committee members voted to hold UK interest rates at their low of 0.50%. In previous meetings 2 members had voted for an increase in the Bank of England interest rate. These minutes have reinforced recent market expectations that it is now unlikely that the Bank of England will increase interest rates in 2015 making the Pound less attractive.
The Pound fell against the US Dollar from an earlier GBP/USD high of 1.5180 to 1.5077 before recovering back to 1.51 whilst against the Euro the Pound fell from GBP/EUR 1.3125 to 1.3020 before recovering back above 1.3050.
Elsewhere the Euro continues to trade at its lowest level against the US Dollar since 2003 trading in the 1.15s and the Swiss Franc remains strong with EUR/CHF trading near parity at 1.0009 and USD/CHF trading at 0.8650.
The Swiss National Bank (SNB) shocked financial markets on Thursday by scrapping a 3 year old cap on the Franc (CHF), sending the Franc soaring against the Euro (EUR). At one stage the Franc had appreciated nearly 30% in value against the Euro, with EUR/CHF falling from 1.2011 to 0.8597 before recovering nearly 15% back to 1.01. The Franc also dropped dramatically against the US Dollar (USD) with USD/CHF falling from 1.0220 to 0.7407 before recovering to 0.87.
As the SNB removed the upper limit on EUR/CHF, the SNB sought to discourage new flows into the Franc by cutting its sight deposit rate from -0.25% to -0.75% making it more expensive for banks and investors to hold the Franc.
The dramatic change in policy from the SNB comes a week before the European Central Bank (ECB) is expected to unveil a bond buying programme to counter deflationary pressures, feeding speculation that the ECB Quantitative Easing (QE) scheme could be so big that the SNB would have struggled to defend the EUR/CHF cap. The Euro was forced lower across the board with EUR/USD falling to 1.1567 before recovering back to 1.16 and EUR/GBP falling to 0.7623 (GBP/EUR 1.3118).
A full copy of the SNB press release can be found at: http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_20150115.en.pdf
The US Dollar (USD) has lost some of its recent gains following this afternoon’s release of much weaker than anticipated US retail sales data. EUR/USD recovered from 1.1728 to 1.1845, whilst GBP/USD rose from 1.5145 to 1.5267. USD/CHF fell from 1.0238 to 1.0139 and USD/JPY fell from 117.96 to 116.08.
Market focus now turns to European and US Inflation data released on Friday 16/01/15.
The US Dollar remains supported as US employment data beat expectations with the US employment rate falling from 5.8% to 5.6% the lowest level since June 2008. The Federal Reserve has held interest rates near zero since 2008 but expectations are increasing that the Federal Reserve will start to increase interest rates this year, possibly in the second quarter.
This coupled with the expectation that the European Central Bank will ease monetary policy has forced EUR/USD to its lowest levels since December 2005, hitting a low of 1763.
In the UK the Pound was supported earlier this morning by better than expected manufacturing and trade balance data pushing GBP/EUR to a high of 1.2844 and GBP/USD up to 1.5174 before receding to 1.2820 and 1.5096.