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European Session – Sterling tumbles to 1-year low versus euro after dovish Carney

Sterling was in focus today as it tumbled to fresh 7-year lows after dovish comments from Bank of England Governor Mark Carney. The pound had earlier rallied on better-than-expected UK inflation data which showed headline CPI rose 0.2% y/y in December, above forecasts of 0.1% gain.

Cable plunged below $1.42, a low not seen since March 2009 after Carney said that the UK economy was not strong enough for an interest rate rise. Focus now turns to Wednesday’s UK employment data and average earnings report.

The weaker pound triggered a recovery in the EURGBP pair, helping it rise back above the key 0.76 pence level to a 1-year high of 0.7694. The euro also rebounded against the dollar to reach the upper $1.08 range due to the bounce in EURGBP but huge gains are likely to be limited due to the risk of the ECB on Thursday.

Data releases out of the Eurozone today had little impact on the euro. They consisted of German final CPI which came in at 0.3% y/y (unrevised from the preliminary estimate), while the January German ZEW economic sentiment index dropped to 10.2 from 16.1 but was still above market expectations of 8.0.

With global stocks rising and lifting risk appetite today following the release of China GDP data, this helped commodity currencies. A 6.9% annual growth rate was not seen as worrying and expectations of more stimulus helped markets move higher. European equity markets followed the Asian markets’ lead.

The Canadian dollar gained as much as 0.8% versus the greenback during the European session, supported by a gain in oil which rose to test the key $30 level. The Bank of Canada meeting tomorrow will be a key risk event for the loonie.

The yen weakened in European trade, underperforming due to flows out of safe havens. The USDJPY pair rose 0.6% to rise above 118 yen. There was a reversal going into the US session, with the pair falling back down to 117 yen.

The only data out of the US today was for the NAHB Housing Market Index which was expected at 61 for January but came in at 60. December’s figure was revised down to 60 from 61.

Next up on the economic calendar for the Asian session is New Zealand inflation data.

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