Daily Currency Update

Get access to our expert daily market analyses and discover how your currency has been tracking with our exchange rate tools.

GBP opens mixed as FX markets are unsure what to focus on next. Stock markets await President Trump’s next tweet.

By Nick Parsons

The British Pound ebbed and flowed quite a bit on Wednesday. At times it was out at the top of our one-day performance table but ultimately ended somewhat mixed; little changed against the USD and EUR, up against the Australian and New Zealand Dollars and down against the CAD. GBP/USD reached a one-week high of 1.4215 before losing half a cent after some softer UK economic data and then rallying back up to 1.42 before a close around 1.4175. A very quiet session in Asia, has seen GBP/USD edge modestly higher but still not yet back on 1.42.

Figures released by the Office for National Statistics showed that in February, total industrial production increased by just 0.1% compared with January’s level; energy supply provided the largest upward contribution, increasing by 3.7%. Manufacturing production declined by 0.2%; the first time output has fallen since March 2017 and the ONS noted that, “within this sector 7 of the 13 sub-sectors decreased on the month”. January’s previously-reported +0.1% m/m increased was revised to flat. Taking the last 3 months together, total industrial production was down -0.1% compared to the previous 3-month period, whilst manufacturing output was up 0.6%. Separate figures on the construction sector showed output fell by 1.6% m/m in February, largely due to a 9.4% decrease in infrastructure new work. Compared with February 2017, construction output fell 3.0%; the biggest year-on-year fall since March 2013. The ONS said it had received some anecdotal information from a small number of survey respondents regarding the effect of the snow on their businesses in the final week of February 2018. The adverse weather conditions across Great Britain could have potentially contributed to the decline in construction output, although it was difficult to quantify the exact impact on the industry.

We also saw the NIESR’s estimate of GDP in the first quarter. The National Institute has had a very good record over the last few years of predicting the official GDP numbers and it is updated every month with an estimate of growth over the previous three months. This was one of the four occasions each year when its estimate lines up in time with the official numbers. The NIESR reports that, “We estimate that economic growth nudged lower to 0.2 per cent in the first quarter of 2018. The main reason for the weakness was severe weather in March which is likely to have disrupted activity in all major sectors of the economy.” This was below consensus estimates for a 0.3% q/q increase and is also below what the BoE was assuming in its latest Inflation Report. The Pound opens in Europe this morning with GBP/USD in the high-1.41’s with GBP/EUR in the high-1.14’s.

Volatility in US equity markets now seems a permanent feature of the investment landscape with yet another 200+ points range for the Dow Jones Industrial Average and 25 points for the S&P 500 Index. Indeed, for the whole of last year, the S&P 500 gained or lost more than 1% on a single day 8 times, the least since the mid-'60s. There have already been 27 1% moves in the first 67 trading days of 2018. Against this background, the performance of the US Dollar looks pretty tame and although it broke down briefly on to an 88 ‘big figure’ on Wednesday, its entire range over the last two weeks has been less than 1¼ points. It opens this morning exactly unchanged from its level 24 hours ago.

The latest US inflation figures came in pretty much in line with consensus expectations, albeit the headline CPI number fell -0.1% against a median forecast of unchanged on the month. The annual rate rose as expected from 2.2% in February to 2.4%. Stripping out the often-volatile food and energy components, core CPI rose 0.2% on the month to take the annual rate up from 1.8% to 2.1%. The main reason for the jump in the annual rate is fairly well-known; this time last year saw some aggressive price reductions for cellphone plans and as the falls now drop out of the y/y calculation, so the annual rates jump. Fed Chair Jerome Powell explicitly referenced this in his speech last Friday. Just because it is well known by policymakers and analysts doesn’t mean that everyone is aware of it, though. With both the headline and core measures now above 2%, surveys of consumers will now be very closely watched for any sign that they are revising up their own expectations of future inflation because of what is happening currently. If they do, then investors will have to start thinking about 3, rather than 2 more Fed hikes for the rest of 2018.

Arch-dove Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, is due to speak this afternoon and we’ll also have the latest weekly initial jobless claims numbers. Otherwise, the economic data calendar in the United States looks pretty thin on Thursday and investors, instead, will be more focused on the POTUS Twitter feed to see which of the current disputes with China, Russia and Syria are most likely to be escalated. The USD index opens in Europe this morning at 89.20.

The Single European Currency finished in second place to the Canadian Dollar on Wednesday as investors wondered whether Mr Nowotny’s remarks on Tuesday might, in fact have been part of some cunning plan to introduce the idea of a 20bp rate hike without Mr Draghi himself having to be implicated and blamed for a policy U-turn. Conspiracy theorist love these mind-games and we’ll never have a definitive answer, though EUR/USD did manage to extend gains up to a high just above 1.2385; its highest level in two weeks before closing at 1.2365. Overnight in Asia, the euro has lost ground and is around a quarter of a cent below yesterday’s best levels.

Speaking in Frankfurt yesterday, ECB policymaker Ardo Hansson gave very little away. He said, “Some people say err on the side of caution; let’s wait and wait. But the risk there is that you wait too long and you’re forced to do a bit of catch up. All these changes have to be very gradual and the ECB has a very strong track record in doing things in a gradual and predictable fashion”. Concluding a very even-handed speech, he said, “The recent low inflation in the euro area has been the result of a combination of factors. Most of them are of a temporary nature and their impact will weaken over time. Therefore, we need to be more patient in achieving our price stability goal.”

Thursday brings speeches from the ECB’s monetary policy heavyweights Coeure and Weidmann and later this morning the European Central bank will publish its account of the March monetary policy meeting. Economic data is limited to Eurozone industrial production where consensus looks for a +0.4% m/m increase. France releases its final March CPI numbers, though Germany’s are not due until Friday. The EUR opens in London this morning at USD1.2365 with GBP/EUR in the high-1.14’s.

Wednesday was a day of very tight ranges for the AUD/USD pair, with its entire high-low range across the three main time zones covered by just 30 pips and a close in New York almost exactly where it had begun the day. That said, the pattern was for a lower AUD in the first part of the day and a rally during the North American session which took the AUD to a high just above US0.7770; its best level in almost two weeks and a close around 0.7760. Overnight in Asia, the pair has again barely moved, although the AUD/NZD cross is a little lower.

In his speech in Perth yesterday, RBA Governor Phil ‘slow and gradual’ Lowe gave a thorough assessment of the economic differences, and similarities, across Australia’s major States. In aggregate, he noted, “the overall picture for the national economy is one of gradual improvement: businesses are feeling better than they have for some time and they have increased their investment and hiring. It is therefore reasonable to expect that economic growth in 2018 will be stronger than the 2.4 per cent outcome we saw last year.” However, one of his main themes nationally – not just in Western Australia – was “slow growth in wages. Wage increases around 2 per cent have become the norm in many parts of the country. This is in contrast to the 3 to 4 per cent increases that were the norm for most of the past two decades. This change is having a sobering effect on the finances of many households. It is also contributing to inflation being low. The latest data suggest that the rate of wages growth has now troughed, with a pick-up evident in the most recent quarter. A further lift is expected, but it is likely to be only gradual.”

On monetary policy specifically, the Governor said, “it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy. The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people. But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up… The Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy. The Australian Dollar opens this morning in Europe in the mid-USD 77’s with GBP/AUD at 1.83.

Having only just been knocked out of top spot on our leader board by the AUD and NZD on Tuesday, the Canadian Dollar took gold medal position on Wednesday; up against every one of the major currencies we follow closely here with gains between one and three-tenths of a percentage point. USD/CAD fell to a low of 1.2564; its lowest since February 19th whilst GBP/CAD hit a fresh 1-month low around 0.9720.

After a decent run of economic data recently, the Canadian Dollar got a further boost on Wednesday from higher global oil prices. As major news agencies all reported that Saudi Arabian defence forces had intercepted missiles of the capital Riyadh, West Texas Intermediate Crude (WTI) prices jumped above $67 per barrel; the highest since December 2014 whilst gold jumped $17 per ounce to $1,356. This lifted the Canadian stock market even as US indices gave up early gains and moved into the red. US President Donald Trump had earlier warned Russia of imminent military action in Syria over a suspected poison gas attack and blasted Moscow for standing by Syrian President Bashar Assad.

Today we’ll have fresh data on new home prices and on Friday it’s nationwide home sales. The Bank of Canada has raised its benchmark interest rate three times since July to 1.25%. Money markets, as well as economists polled by Reuters, expect the central bank to hike twice more this year. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.25’s and GBP/CAD in the mid-1.78’s.

Price action in the New Zealand Dollar across the three major time zones on Wednesday was identical to that of its Aussie cousin: down against the USD in the first part of the day and a recovery during the New York session, all contained within a relatively narrow 30 pip trading range. NZD/USD opened around 0.7370 and fell to a low just below 0.7350 before closing almost exactly unchanged on the day around 0.7360. The Kiwi Dollar has had a good session overnight in Asia and though it is the best performer of all the majors we follow closely here, we’d caution against reading too much into relatively narrow trading ranges.

The speech today from RBNZ Assistant Governor and Head of Economics John McDermott focused on the evolution of the monetary policy framework over time rather than any fresh message about how the policy itself might currently be changing. In terms of the new arrangements announced by the Labour Government, the Reserve Bank of New Zealand Act will formalise a monetary policy committee (MPC), and add members from outside the Bank, ‘externals’, onto the committee. The Act will allow the MPC to have between five and seven members, but there will be seven initially, and there will always be more internal than external members. All members will be nominated by the Reserve Bank Board and appointed by the Minister of Finance. Details of the first Charter are yet to be determined, but the Minister intends for the MPC to aim to reach decisions by consensus, and for non-attributed votes to be published where there is not consensus. The Minister also intends for non-attributed records of meetings to be published that reflect any differences of view among the MPC.

Statistics New Zealand this morning published March credit card spending numbers. Seasonally adjusted total retail spending on credit and debit cards increased 1.0% during the month, beating consensus estimates of a 0.5% monthly gain. Core retail spending, excluding fuel and vehicles, rose 1.6%. Card-holders across all industries made 151 million transactions in the month. The average value of $49 was unchanged on the year and down from $50 in February. The Kiwi Dollar opens in London this morning at USD.7375, with GBP/NZD around 1.9235.