Sterling roared to a robust set of gains against its most-traded currency peers on Friday as markets cheered the British government’s new conciliatory tone over Brexit.
Having previously struck a hardline with European negotiators, raising the possibility of Britain leaving the bloc with no new trade deal, the government has recently sounded much more constructive. Indeed, it has been explicitly acknowledged that the UK has financial obligations to the EU after its exit, which was seen by European leaders as a positive step towards agreeing a new deal. To begin talks over Britain’s future trading relationship, the UK government must first conclude exit talks.
By standing down on issues such as the exit bill, the government has assuaged fears of a protracted standoff and this bolstered the appeal of the Pound.
The Pound to Euro exchange rate rallied by around 80 pips to strike a three-week high on Friday as fears of Britain falling out of the European Union without a new trade deal cooled following another concession from the UK government on the terms of divorce.
The single currency, on the other hand, was dealt a blow by speculation that policymakers at the European Central Bank were keen to keep its quantitative easing scheme open. Sources at the bank said that putting a future end date on the large-scale asset purchasing scheme could come back to bite the ECB if the economic situation were to deteriorate. Demand for the Euro softened when the leaked information, which came from three unnamed sources at the bank, was released.
Sterling appreciated by around 150 pips against the US Dollar on Friday, smashing through longstanding psychological resistance as soft US inflation data poured cold water on Federal Reserve rate hike bets.
‘Cable’ struck its highest level for 10 months following the latest American consumer price index report, which detailed how price pressures sank in June. The score underwhelmed market forecasts and was seen to reduce the chances of a flurry of rate hikes from the US central bank over the next 18 months.
At present the Fed dot plot projection graph appears to suggest that rates will rise a further four times (100 basis points) between now and the end of 2018. Market bets are much less optimistic, giving a 50/50 chance of another rate hike taking place in 2018. This negative shift in market rate expectations explains why the ‘Greenback’ is having such a bad time of late.
Separate reports showed that retail sales contracted -0.2% in June, industrial production expanded 0.4% and consumer confidence dipped from 95.1 to 93.1. Taken together the results had a bearish impact on the US Dollar.
Upbeat Brexit discussions helped send Sterling higher by around a cent against the Canadian Dollar on Friday. Robust demand for the Pound has helped erode away much of the gains made by the ‘Loonie’ on Wednesday when the Bank of Canada hiked rates and sent out a hawkish signal for the future. Because of the BoC’s apparent appetite for raising rates in the near-term, it is entirely possible that we could see GBP/CAD trend lower over the coming weeks and months.
A market-wide rise in demand for Sterling allowed the Pound to Australian Dollar exchange rate to post mild gains on Friday. GBP/AUD had tumbled to a three-week low during the afternoon, when downbeat US inflation data led to a downgrade to Fed interest rate expectations. However, Sterling surged back to life later in the day and ended the London session on top.
The Pound to New Zealand Dollar exchange rate jumped over 150 pips on Friday as Sterling came into demand on hopes that the British government’s newfound conciliatory tone on Brexit would lead to a positive outcome at the end of the two-year divorce negotiations.
23:45 NZD Consumer Prices Index (QoQ) (2Q) Medium 1.0%
23:45 NZD Consumer Prices Index (YoY) (2Q) High 2.2%
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