Sterling posted further gains against most of the majors yesterday as investors reacted to news of a deal that could see £3.5 billion pumped into the British economy.

The Pound surged following an announcement from Japanese company Mitsui Sumitomo Insurance suggesting it was close to completing a £3.5 billion takeover of British insurance firm Amlin. Mergers & Acquisitions like this often have an impact on global exchange rates.

Demand for the UK currency could remain strong this morning if data shows that industrial production increased in July but if the report disappoints we could see Sterling cool off a little.

Euro

The Pound to Euro exchange rate appreciated by around 70 pips yesterday as M&A speculation bolstered Sterling’s appeal to international investors. The bulk of the Pound’s gains came against the Japanese Yen but the proposed £3.5 billion cash injection strengthened the UK currency against most of its major peers too.

In the Eurozone it was reported that second quarter growth was a little stronger than markets had initially estimated. The Q2 GDP print was revised higher from 0.3% to 0.4%, partly due to better-than-anticipated export numbers and partly due to an upgrade to Italian domestic output. German trade figures were particularly positive, with the currency bloc’s largest economy registering its biggest surplus since reunification in 1991.

US Dollar

Sterling rallied by another 100 pips against the US Dollar yesterday, marking a decent two-cent gain so far for GBP/USD this week.

The news of a multi-billion Pound takeover deal sent Sterling surging yesterday and there is potential for further gains later on in the week if officials at the Bank of England appear keen to start tightening monetary policy in the New Year, although it must be said that most analysts expect the Bank of England to shoot down rate hike bets on Thursday rather than accelerate them.

It looks like a quiet week of US economic data so all eyes will be on Britain where industrial production and trade balance figures are due for release today.

Canadian Dollar

The Pound rose by around 100 pips against the Canadian Dollar yesterday morning on M&A news but Sterling failed to hold onto its gains through the afternoon as improved risk sentiment helped prop-up the commodity-sensitive ‘Loonie’.

This afternoon sees the Bank of Canada announce its benchmark interest rate for September. Most traders anticipate that the BOC will leave rates on hold at 0.50% but with dismal growth numbers coming out of China there is a chance that we could see the central bank cut rates. The Canadian Dollar would likely plunge sharply if a rate cut is announced, or even if BOC Governor Stephen Poloz hints at the possibility of lower rates in the near term.

Australian Dollar

Sterling was unable to maintain morning gains against the Australian Dollar yesterday as markets bet that the latest soft Chinese data print (a disappointing trade report) would prompt officials in Beijing to provide the flagging economy with further stimulus support. GBP/AUD sank by around -175 pips during the first five hours of trading in the United States as Chinese stimulus-related risk-on trades flourished.

New Zealand Dollar

Talk of enhanced stimulus in China helped drive the risk-sensitive New Zealand Dollar higher by around 300 pips against the Pound during the New York session yesterday. However, it is entirely possible that we could see Sterling push ahead against the ‘Kiwi’ Dollar today in the build-up to the Reserve Bank of New Zealand’s latest policy announcement. Markets are primed for a 25 basis point cut to the benchmark rate and the ‘Kiwi’ is liable to depreciate if the RBNZ follows through.

Data Released

09:30 GBP Industrial Production (YoY) (JUL)
09:30 GBP Manufacturing Production (YoY) (JUL)
09:30 GBP Visible Trade Balance (Pounds) (JUL)
15:00 CAD Bank of Canada Rate Decision (SEP 9)
22:00 NZD Reserve Bank of New Zealand Rate Decision (SEP 10)