Sterling Higher on Brexit Hopes
Morning mid-market rates – The majors
November 1st: Highlights
- Traders clutching at straws
- Eurozone data adds to confusion over dovish ECB
- FOMC to provide advance guidance
Barnier Comments lead to (misplaced) optimism
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
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 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.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”