A good day for Sterling – the recovery continues and a rate hike may be sooner than expected
Sterling continued its net recovery throughout yesterday’s session, trading up on both the Euro and the Dollar. Bank of England Monetary Policy Committee member Cunliffe spoke yesterday after the European close, touching upon credit conditions in the housing market. Overall, the potential first increase in UK interest rates is now expected sooner rather than later, which provided net Sterling support. The 10-week highs for GBPUSD were maintained yesterday as EU referendum polls are still pointing towards Britain staying in the union.
Preliminary GDP figures for the UK will be released this morning and could apply some pressure to the Pound as weaker figures are expected ahead of the EU referendum. Markets are predicting the GDP growth rate to have slowed to 0.4% in Q1 2016, down from 0.6% seen in the last quarter of 2015. The recent bullish momentum of Sterling means negative figures could have muted impact on the markets.
GBPEUR is currently testing the 1.2900 level. The pair rose by 0.4% yesterday, despite GFK German consumer confidence survey for May coming in above expectations at 9.7, beating last month’s survey figure of 9.4. In Spain, King Felipe has called for an election re-run scheduled June 26th, three days after our EU Referendum. The confluence of events is likely to deter investors from holding Spanish Bonds.
The Dollar remained under pressure on Tuesday after disappointing data and the inevitable caution leading up to the Federal Reserve meeting later today. While the Fed is almost certain to leave rates unchanged, the tone of the statement will be all important as investors will look for any clues as to when interest rates will rise. The market expects a slightly more hawkish tone from the Fed. However, given that yesterday’s data missed expectations, Dollar bulls will fear that any dovish tones will put downward pressure on the Greenback. US durable goods data was weaker than expected with a headline 0.8% gain against an expected 1.8% advance and underlying orders fell 0.2%, compared with the expectation of a 0.6% rise.
Cable continued to strengthen as it broke through the 1.4600 level for the first time since early February, helped by the Dollar being weakened by the disappointing data releases. GBPUSD hit daily highs of 1.4639, but the Dollar did fight back as the US traders took over in the afternoon. The pair opened this morning at 1.4581.
EURUSD reached highs of 1.1339 in the morning session yesterday as caution surrounding the Federal Open Market Committee statement put the Dollar on the backfoot against the common currency. The Dollar bulls did claw back some of those losses as the day went on, with the pair opening today at 1.1298.
Data to watch: 9.30am UK GDP. 7pm US Fed Interest Rate Decision. 7.30pm US Fed Monetary Policy Statement.