Markets Cautious Ahead of BoE Rate Decision, GBP Exchange Rates Steady
Pound (GBP) exchange rates remained within a narrow band on Wednesday morning as markets grew increasing cautious before the looming Bank of England (BoE) rate decision.
Analysts at the financial services company RBS expect that the Monetary Policy Committee’s (MPC) guidance will be hawkish, pointing towards a rate rise as early as May.
Markets are not expecting a rate hike to occur at tomorrow’s meeting, however, with Bank of England Governor Mark Carney and his team having stated that they are waiting for confirmation on the Brexit transition front before making significant changes to the interest rate.
Meanwhile, UK Prime Minister Theresa May and senior ministers are expected to meet today to try and decide what any future relationship between the UK and the EU will look like.
A lack of demonstrable progress in negotiations could cripple the Pound, particularly if Carney continues to point to the Brexit process as one of the primary deciding factors in monetary policy decisions.
In other pertinent news a leaked document pertaining to the EU’s withdrawal agreement asserts that the EU wants the ability to restrict the UK’s access to the single market if there is a dispute after Brexit.
This would include the power to suspend ‘certain benefits’ during the transition phase – a prospect that could pose a threat to the UK’s economy.
The market response to this news was, understandably, negative, though it remains to be seen exactly how Downing Street will respond.
GBP/EUR Exchange Rate Narrows, Germany Clinches Grand Coalition Deal
The Pound Euro (GBP/EUR) exchange rate narrowed on Wednesday morning, limited by anticipation of Thursday’s BoE rate decision but gaining on news that Germany’s Social Democrats (SPD) could gain control of the German finance ministry and the foreign ministry.
After four months without a governing party German Chancellor Angela Merkel and SPD leader Martin Schulz have broken the deadlock and hammered out a deal that could see Merkel continue as German Chancellor.
Whilst one might expect the markets to celebrate a possible end to this period of uncertainty, news that the SPD could gain significant control over the Eurozone’s economic policy has left investors slightly spooked.
Indeed, the shift in power could result in significant changes to Germany’s economic methodology, particularly if the next Finance Minister takes a softer stance than Wolfgang Schäuble on the issues of debt relief and Eurobonds.
It should be stressed, however, that the SPD still has to approve the plan by vote – something that is expected to take place in the next few weeks.
GBP/USD Exchange Rate Falls Ahead of US Fed Presidents Speeches
Appetite for the US Dollar (USD) extended on Wednesday morning, bolstered by an upcoming run of speeches from various regional presidents of the US Federal Reserve.
Dallas President Robert Kaplan is due to speak in Frankfurt at 11:00GMT, followed by New York President William Dudley, Chicago President Charles Evans and finally San Francisco President John Williams.
Out of all of these speakers only Evans is considered dovish, with the others either considered to be somewhere in the middle ground or outright hawkish.
It is highly likely that following robust growth in American wages and employment these speakers will take an optimistic stance when discussing the outlook of the US economy, possibly even espousing calls for monetary policy tightening sooner than previously thought.
This could support the US Dollar even more, potentially putting GBP/USD under extended pressure.
GBP/CAD Exchange Rate Slips as Crude Oil Prices Recover
Oil prices rose slightly on Wednesday, recovering from yesterday’s slump, after a report that US crude inventories had fallen last week.
This news provided some support for the Canadian Dollar (CAD), though GBP/CAD’s poor performance on Wednesday morning seemed to have resulted predominantly from ongoing Brexit related uncertainty, caution ahead of Thursday’s BoE rate decision and fresh news that the EU wants to be able to restrict the UK’s access to the single market if there is a dispute following Brexit.
GBP/AUD Exchange Rate Limited by Upbeat Australian AiG Performance of Construction
The Pound Australian Dollar (GBP/AUD) exchange rate continued its slide into the early hours of Wednesday, limited by reports of growth acceleration in Australia’s construction sector.
The Australian Industry Group’s performance of construction index printed at 54.3 in January, up from 52 in the previous period and marking the strongest expansion in the construction sector in six months.
This was largely driven by a rise in sales, new orders, employment, stocks and average wages – overall an extremely robust print that bodes well for the future of the Australian economy.
Nonetheless, the upward potential of the ‘Aussie’ Dollar seems to be continually limited by the caution expressed by the Reserve Bank of Australia (RBA) in their latest monetary policy meeting.
Looking ahead, an ongoing rise in the US Dollar (USD) could also hurt its Australian counterpart, particularly if rate hike hopes continue to increase.
GBP/NZD Exchange Rate Down after Global Dairy Price Surge
The Pound New Zealand Dollar (GBP/NZD) exchange rate extended its slide into Wednesday, falling as markets digested yesterday’s surge in global dairy prices.
Overall prices rose 5.9% in the global dairy trade auction, bolstered by the ongoing New Zealand drought and the effect it has had in cutting supply.
Amy Castleton, analyst at AgriHQ supported this analysis:
‘Falling milk production in New Zealand – and revisions to offer volumes – continue to support prices on GDT.’
Looking ahead, the Reserve Bank of New Zealand (RBNZ) is due to announce their official cash rate tonight and whilst a rate hike is not expected, elements like inflation, GDP and expansionary fiscal policy will likely take centre stage.
If the RBNZ proves hawkish in their accompanying statement then pressure on the GBP/NZD exchange rate will extend.
If, however, ongoing issues of low inflation are cited and the bank opts for a cautious outlook, then the Pound might find some support.