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Currency Market Analysis

Jan 23, 2020 | Currency Market Analysis

Global Themes

Sterling climbs after business optimism soars

-Proud pound cheers optimism
-ECB meeting in focus
-Aussie higher but China virus fears linger
-GBP/CAD at 5-week high

GBP

Proud pound cheers optimism

Sterling is strengthening as expectations of a Bank of England (BOE) rate cut continue to diminish following positive UK data releases this week. Surprise upbeat labour market data on lifted the pound initially, but it was yesterday’s data release which saw business optimism hit a 6-year high and marking its biggest quarterly change on record, which sparked a sterling surge.

According to the Confederation of British Industry’s quarterly survey, the bounce in optimism rose to 23 in January, from -44 in October, providing evidence the UK general election result has boosted business confidence. Investors had been increasing bets of a rate cut by the BOE next week, but those bets are now being trimmed, with money markets pricing a 55% chance of a 25-basis point cut, down from 72% on Monday (source: Reuters). GBP/USD broke above a key downward trendline resistance to reach a 2-week peak of $1.3152. GBP/EUR marched on towards €1.19, recording its highest level of the new year.

Focus will be on pivotal flash PMI figures tomorrow before BOE policymakers make their decision at next Thursday’s meeting.

ECB Meet

ECB meeting in focus

The European Central Bank (ECB) holds its first monetary policy meeting of the new year today and delivers its rate decision at 12:45pm followed by a press conference with ECB President Christine Lagarde. No changes are expected but a strategic review of the bank’s policy tools for the first time since 2003 may influence the Euro today.

Although recent Eurozone data has been better than expected, the overall outlook still appears fragile. Eyes will be on the ECB’s interpretation of this data and whether it will change its strategy on inflation, possibly letting it run beyond its near to but below 2% target level. There is also growing speculation that the central bank could raise interest rates in the next couple of years, which would likely attract investors and benefit the common currency. For now, the ECB’s meeting may lack excitement, but attention will be on future policy decisions and macroeconomic data in the build-up.

Eurozone flash consumer confidence data drops in at 10:00am today and important PMI readings on Friday could prompt further Euro weakness if the data reveals softer sector activity. EUR/USD remains capped below $1.11 as GBP/EUR creeps closer towards €1.19.

AUD

Aussie higher but China virus fears linger

The Australian Dollar has climbed around 0.5% against many currency peers this morning in including the British Pound. The Australian jobless rate fell to a 9-month low and twice the amount of jobs were created in December compared to analysts’ expectations. GBP/AUD has fallen back to A$1.91 but is still near to post-EU referendum highs.

There was growing speculation that the Reserve Bank of Australia would cut interest rates next month, but after this positive data surprise, those bets have been significantly reduced, with money markets now pricing a 25% chance rather than 50%. However, ongoing wildfires are forecast to hit the economy hard and now the China virus is also another negative for Aussie sentiment. Later today, the World Health Organisation will decide whether to declare the coronavirus outbreak as a global health emergency.

Safe-haven assets remain strong due to the increasing fears of the virus spreading over the Chinese New Year period. The Japanese Yen is the obvious winner in the currency market amid risk averse markets.

GBP/CAD

GBP/CAD at 5-week high

The Canadian Dollar weakened across the board yesterday following a dovish Bank of Canada (BOC) monetary policy meeting. The BOC left interest rates unchanged but hinted at a possible cut in coming months.

The spotlight will shine on future macroeconomic data to provide clues on how the BOC might act. Should growth and inflation numbers disappoint, interest rate cut expectations will likely rise and punish the CAD.

GBP/CAD is flirting with C$1.73 this morning – a level not traded since mid-December. The next hurdle is likely C$1.7356, before C$1.7460 comes into play.


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