Sterling Higher on Brexit Hopes

Barnier Comments lead to (misplaced) optimism

The pound traded at its highest level in a month versus the Euro yesterday reaching a peak of 1.1407 and continuing to climb overnight in Asia. It also made ground against the dollar despite today’s FOMC meeting being likely to provide advance guidance over a rate hike in the U.S. next month. Versus the Greenback, the pound came close to 1.3300, trading as high as 1.3289 although it faces a tough battle to breach strong resistance at 1.3340.

It is sure sign of a market that is trying to fit a story to price action when an entirely innocent comment is attributed with being the catalyst for a move higher.

Michel Barnier, the Chief EU Brexit Negotiator, when asked yesterday, informed reporters that the agenda and dates for the next session of Brexit talks would be released imminently. This has been interpreted as a sign that Brussels are preparing to take the initiative to press forward at a faster pace.

The reality, as ever, likely to be slightly different.

Traders are starting to consider the possibility that tomorrow’s rate hike in the U.K., should it happen, could be the first in a series. This is logical as Central Bank’s tend to shy away from one off moves unless there is a specific reason like, for example, for last year’s cut.

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Draghi waiting for inflation spike

Mario Draghi, the ECB President is by nature a cautious man. He takes the ECB’s price stability mandate at its face value and until inflation becomes a major factor in the Eurozone economy he intends to provide as much monetary support to the region’s weaker economies as he can.

Sr. Draghi is not concerned with pre-emptive action despite Bundesbank President Jens Weidmann’s, assertion that inflation is on target and will start to rise in 2018.

Yesterday’s GDP data, as expected gave some respite to the single currency against the dollar pushing it to 1.1662 but the resistance at 1.1680 held firm and it closed close to unchanged on the day.

GDP rose to 2.5% year on year in the third quarter, but inflation was remains benign. Eurozone wide consumer prices rose by just 1.4% in the year to September, well below the ECB’s 2% target although unemployment hit its lowest level since 2009.

The Bundesbank believes that falling unemployment coupled with greater output and productivity will lead to higher inflation but with the consumer still not fully onboard, Sr. Draghi’s wait and see policy is likely to prevail.

FOMC Expectations support dollar

The FOMC meets today with interest rates expected to be left on hold as the effect of previous monetary policy actions work their way through the system. Janet Yellen faces a tough meeting sitting opposite Jerome Powell, the man the market believes is set to be her replacement. Powell shares Yellen’s views on both proactivity and providing the market with advance guidance so the transition should be reasonably seamless. The final decision is expected imminently, certainly before the president leaves for a summit in South East Asia at the weekend.

The dollar index rose by 0.1% yesterday as the expectations for tighter monetary policy through 2018 provided support. However, it remains shy of the 95.16 level reached earlier in the week as the euro, in particular, recovered a little ground.

With Central Bank actions beginning to diverge after a long period of convergence in reaction to the global financial crisis, interest rate differentials are set to become the major driver of currency values in 2018.

The employment report for October due for release on Friday is likely to show a strong rebound from September’s disappointing release. The headline will probably be well more than 200k new jobs, but it is the revision to September’s disappointing loss of 33k jobs and the rise in hourly earnings that will interest analysts the most.