The Pound continued to struggle versus the majors yesterday as speculative investors pushed rate hike bets further into the future. Markets now expect the Bank of England to remain on the sidelines until October of next year – despite comments from BoE Governor Mark Carney suggestive of a rate rise in the second quarter of 2016.

Ben Broadbent, who is a member of the nine-person monetary policy committee on Threadneedle Street, told reporters yesterday that even had it not been for the slowdown in China he would not be considering voting for a rise in borrowing costs at this juncture. Broadbent noted that underlying inflation prospects were still too weak to warrant higher rates and suggested that unit labour costs – a measure of pay and productivity – would have to rise from the current 1.0% to 2.0% or more before he would be voting for tighter policy. He also mentioned that it was ‘entirely predictable’ that markets had pushed back their hike bets until October of next year, which was seen as a hint that he expects rates to remain low until then, and this led to a drop in demand for Sterling.

Euro

The Pound to Euro exchange rate sunk to a monthly low yesterday, declining by over half a cent as BoE policymaker Ben Broadbent’s dovish remarks weighed on Sterling and a slightly better-than-expected German business sentiment result boosted the single currency.

The IFO’s latest gauge of business confidence showed that sentiment rose from an upwardly revised 108.4 to 108.5 in September, beating forecasts of a dip to 107.9. Business expectations also rose, from 102.2 to 103.3.

However, it may not be wise to read too much into the IFO figures because the Volkswagen emissions scandal threatens to drive sentiment lower over the next month. It remains to be seen how much of a negative impact the issue will have on German GDP, but with one in six German jobs connected to the automobile industry there is scope for a widespread downturn if it emerges that other manufacturers were using illegal devices to cheat emissions tests. The VW scandal has now overtaken Greece and China as the biggest threat to economic sentiment in the Eurozone and subsequently the possibility of a GBP/EUR revival cannot be discounted.

US Dollar

Sterling struck a fresh fortnightly low against the US Dollar yesterday as dovish BoE sentiment gave traders the impetus to send ‘Cable’ lower. However, technical support at a key level helped the Pound recover most of its losses by the end of the London session.

Despite the recent negative shift in US rate hike projections, GBP/USD is beginning to look susceptible to downtrends. If Sterling falls by another -50 pips then it will be seen as a signal for technical traders that greater lows could be on the cards over the next few weeks.

US durable goods orders printed at -2.0% for August yesterday, which was slightly better than economists’ forecasts of -2.3%, and the ‘Greenback’ was also boosted by a sturdy 5.7% rise in new home sales. If this afternoon’s second quarter US GDP print comes in strongly at 3.7% as previously estimated then the US Dollar could rally but if the data report disappoints then Sterling could mount a mini recovery.

Canadian Dollar

The Pound jumped higher against the Canadian Dollar yesterday in reaction to a rate cut in fellow oil-producing nation Norway, which sent the Norwegian Krone reeling and served as a reminder of the damaging impact the latest leg of the oil price slump could have on the ‘Loonie’. However, the downtrodden Pound was unable to hold onto its gains for long.

Australian Dollar

The Pound to Australian Dollar exchange rate appreciated by around 250 pips in the morning yesterday but the ‘Aussie’ endeavoured to claw back its losses during the afternoon leaving GBP/AUD flat on the day. Markets are beginning to bet that the Reserve Bank of Australia will be moved to cut interest rates further over the next three months in reaction to the slowdown in China but weak sentiment towards the Pound has prevented GBP/AUD registering any significant gains so far in Septmeber.

New Zealand Dollar

Sterling plunged by around three cents against the New Zealand Dollar yesterday as investors continued to give the ‘Kiwi’ a boost following another upbeat dairy auction. Fonterra, New Zealand’s largest producer of milk, hiked its payout forecast by NZ$0.75, meaning that farmers will now receive NZ$4.60 per kilogram of milk solids rather than the NZ$3.85 previously reported. Because dairy products are the most lucrative of New Zealand’s exports the ‘Kiwi’ Dollar rallied following the announcement.

Data Released

13:30 USD Gross Domestic Product (Annualized) (2Q T) Medium 3.7%
15:00 USD U. of Michigan Confidence (SEP F) Medium 86.5