Sentiment towards the Pound improved slightly on Friday in response to a fairly sanguine inflation expectations report. Despite the consumer price index currently standing at a half-century low of -0.1%, the Bank of England’s latest survey showed that Britons expect inflation to rise to +2.2% over the next 12 months. Governor Mark Carney commented last month that it was ‘possible’ that interest rates would be higher in a year’s time and the chances of this happening will greatly increase if inflation does in fact reach 2.2%.
The Pound’s fortunes over the next few months will likely be dictated by rate hike bets, which in turn will be effected by important British ecostats such as inflation, unemployment and wage growth.
Euro
Sterling rallied by around a third of a cent against the Euro on Friday as global risk sentiment was damaged by a surprisingly strong American labour market report, which some investors saw as a sign that interest rates could be on the verge of rising in the world’s largest economy.
Relations between Greece and its creditors soured over the weekend as Greek Prime Minister Alexis Tsipras dismissed proposals from the institutions as ‘absurd’ and vowed to fight for a deal that includes debt relief, protection for pensioners and low primary surpluses. European Commission President Jean-Claude Juncker reacted viciously to Tsipras’ comments and urged Greece to put forward a proposal that featured a credible alternative to pension reform. It emerged that Juncker refused to take a phone call from the Greek leader on Saturday and is not willing to speak to Tsipras until a counter-proposal has been submitted. The drama continues.
All signs out of Athens suggest that Greece is unwilling to budge and subsequently the threat of default looms large over the Euro.
US Dollar
Demand for the ‘Greenback’ rocketed on Friday afternoon when a bullish US non-farm payrolls report bolstered hopes of an earlier-than-expected rate hike from the Federal Reserve. Recent remarks from the US central bank had pointed towards a tightening of monetary policy in December but markets drove the US Dollar higher as the strong jobs numbers put the prospect of a hike in September back on the table.
The headline non-farm index came in at 280,000, smashing expectations of 226,000, and traders were also cheered by a better-than-anticipated 2.3% rise in average hourly earnings. The unemployment rate actually rose from 5.4% to 5.5% but this was mainly due to a bumper 397,000 surge in participation, which is actually considered to have a positive impact on the economy. The Pound to US Dollar exchange rate softened by around a cent in reaction to the NFP report.
Canadian Dollar
The Canadian Dollar also benefitted from an upbeat jobs report on Friday. The headline Canadian jobless rate remained steady at 6.8% but investors were pleased by a surprisingly strong surge in employment. GBP/CAD plunged -170 pips in reaction to news that the Canadian economy added 58,900 jobs in May, which massively overshot expectations of 10,000 and brought the year-on-year total up to a 19-month high of 192,300. The upbeat data supported investment in the ‘Loonie’ because it was seen to reduce the probability of the Bank of Canada cutting rates again over the next few months.
Australian Dollar
Sterling struck its highest level in just under six years against the Australian Dollar on Friday as a market-wide sell-off in perceived riskier assets weakened the high-beta ‘Aussie’. The catalyst behind the surge in risk aversion flows, and the 150 pip rise in GBP/AUD, was the robust US non-farm payrolls report, which brought the possibility of a Fed rate hike in September firmly back into focus.
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