Poor UK retail sales data weighed on Bank of England (BoE) rate hike expectations on Thursday, leaving the pound in a weaker position against most of its peers.
Sterling is rebounding further today. GBP/EUR has risen to €1.1248, while GBP/USD is at US$1.3298. GBP/AUD has risen to A$1.6973, GBP/NZD to NZ$1.8621, and GBP/CAD to C$1.6575.
The pound will be on volatile form today, even though there is no UK data set for release. Read on to find out why…
What’s been happening?
It was a bad day for the pound yesterday. Firstly, the Bank of England’s (BoE) latest credit conditions and bank liabilities survey showed that UK banks were planning to curb lending by the most since the financial crisis.
While this is good for tackling the UK’s mounting levels of household indebtedness, there are many who believe the continued strength of consumer spending since the referendum – in spite of surging prices – is down to household’s ability to borrow.
Lower borrowing could therefore slow spending, weakening inflation and delaying any attempts by the BoE to hike interest rates.
Later, things got worse for Sterling after the latest round of Brexit negotiations ended in deadlock. Neither the UK nor EU seemingly has any intention of budging on the issue of the so-called divorce bill, meaning talks of trade or transitional periods will have to be delayed.
This suggested the UK is heading towards a ‘no deal’ or ‘cliff edge’ Brexit; the most severe form of exit from the point of view of the market.
Strong Eurozone data helped keep GBP/EUR on the decline. Industrial production in the currency bloc grew 1.4% on the month in August, against forecasts of 0.6%. Meanwhile year-on-year production beat forecasts of slowing to 2.6% by accelerating from an upwardly-revised 3.6% to 3.8%.
Meanwhile the GBP/USD exchange rate was able to somewhat mitigate losses thanks to the release on Wednesday evening of Federal Open Market Committee (FOMC) meeting minutes from September.
The minutes were not as upbeat as markets had expected, even if they did continue to point towards a rate hike in December. The US dollar weakened on the fears that December’s likely round of tightening could be the last step towards normalisation for a while, rather than the continuation of the cycle leading into 2018.
What’s coming up?
There is no UK data on the calendar today, leaving the pound vulnerable to developments from the political sphere and overseas.
There isn’t much on the Eurozone data calendar, apart from speeches from European Central Bank (ECB) officials Mersch and Constancio.
Meanwhile, there is plenty on the US data calendar to keep the dollar volatile. As well as consumer prices and advance retail sales data for September, the University of Michigan’s preliminary confidence index for October will also be released.
All this data will cause not only the GBP/USD exchange rate to fluctuate, but also the GBP/EUR rate, as the euro is very sensitive to movements in the US dollar.
Phil joined the corporate foreign exchange department in 2000, and initially worked as a Senior Executive Dealer on the private client desk. In 2007, Phil moved to the corporate dealing desk as a corporate dealer and now oversees the corporate trading desk. Phil helps to manage the trading activity of the dealing desk and also works with a portfolio of corporate clients to help with their foreign exchange and risk management needs. Phil has attained FSA approval and has completed the Certificate in International Treasury Management (CertITM).
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