Raphael Sonabend, FX Analyst
In a surprising move, the two hawks of the BoE’s monetary policy committee (MPC) voted to hold interest rates for the first time in six months. A unanimous vote to hold rates at the current level saw the pound fall against all counterparts as analysts concurred that an interest rate hike isn’t likely to happen until 2016. The pound quickly recovered all lost ground as the markets adjusted to this news and employment data came into the spotlight. The action didn’t stop there, across the pond the Bank of Canada cut their overnight rate from 1.00% to 0.75% and the Loonie fell four cent against the pound. Volatility is likely to continue into today’s session as the ECB press conference is finally upon us. As full-blow quantitative easing is expected to be announced, economists will be furiously debating the conditions of this stimulus plan. How much money will Draghi pump into the economy? How much pressure will be placed on central banks? Did the recent ECB stress tests account for this new amount of pressure? How far can Germany be pushed? All these questions and more should be answered (or swiftly avoided) by Draghi at 13:30 today in an hour long conference.
GBP/EUR: Currently trading at 1.3050
- As the MPC cut interest rates yesterday, the pound immediately fell one and a half cent against the euro. The euro’s gains failed to hold as traders quickly turned their attention to the positive employment figures that raised optimism once again. Average earnings index 3m/y increased to 1.7% from 1.4%, as earnings outpace inflation, consumer confidence increases as spending money rises.
- All focus today will be on the ECB meeting this afternoon. Whilst the general consensus is that the arrival of QE has been widely priced into the markets, if the amount Draghi announces is below predictions, we may see another euro slump.
GBP/USD: Currently trading at 1.5151
- Cable saw volatility yesterday as this pair traded within a cent range after the MPC cut interest rates. A combination of mixed US data and strong UK employment figures saw the pound recover all lost ground in the evening. US monthly building permits data fell to 1.03M from 1.05M, below the forecast 1.06M. December saw the most single-family homes starts in almost seven years, a strong sign for 2015 construction.
- US unemployment claims are likely to be overshadowed by the ECB press conference, which begins at the same time as the US release. Whilst the EUR/USD fall that occurred last week is likely to be the last in anticipation of QE, there is a possibility of another if there are any more surprises and the dollar would strengthen against the pound as a result.
EUR/USD: Currently trading at 1.1612
- A lot of volatility seen in this pairing yesterday as traders anticipated the QE announcement today and results from the latest Greek election polls were released. In Greece, the latest poll showed Syriza in the lead with a 5% gap between them and the conservatives. As tensions rose, this pair slumped then spiked a cent.
- The ECB meeting will lead the way for trading today. Speculation this morning will govern the rate before the actual conference pulls focus this afternoon. After a dovish day for central banks yesterday, traders will be hoping to spot some hawks this afternoon.
GBP/AUD: Currently trading at 1.8698
- As the Bank of Canada cut their overnight rate yesterday afternoon, traders sold their Canadian dollars in favour of safer currencies. As the Aussie attempted a run over 1.00 against the Loonie, GBP/CAD surged 1.32% and Sterling managed to rise against the Australian dollar. Now trading around 1.87, the Aussie is likely to try to recover as much ground as possible in this morning’s session.
- The ECB conference today will shake the whole FX market and commodity currencies could be especially affected as a result. A greenback hike, which could occur after the announcement, would lead to strength from all higher-yielding currencies.
GBP/NZD: Currently trading at 2.0083
- Following identical trends to GBP/AUD, this pair saw Sterling strength after the Bank of Canada cut interest rates. Jumping four cent yesterday afternoon, the Kiwi is now struggling to recover as this pair is once again above 2.00.
- After a week of surprises from central banks worldwide, the ECB could share its own revelations this afternoon. As volatility is likely to continue throughout the day, strong gains from both sides are possible throughout.
GBP/CAD: Currently trading at 1.8707
- In a shock move that sent waves through the markets, the Bank of Canada cut their overnight rate from 1.00% to 0.75%. In a monetary policy report, which was both negative and pessimistic, the BOC stated that inflation is likely to fall below 1.00% sometime in the first half of 2015. Their graphs paint an even more negative picture as their uncertainty levels suggest that CPI falling below 0.00%, is a strong possibility. As oil prices continue to fall, the Canadian economy is now relying on strong US activity for upside risks to inflation.
- Volatility is expected throughout the day as the ECB meeting approaches. After yesterday’s report, the Loonie may fare poorly in the midst of volatility however USD strength could help stimulate a Loonie recovery.
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