Sterling tests 1.3000 as BoE and Brexit combine
November 2nd: Highlights
- Hawkish Bank of England sees Brexit dependent rate hikes
- Euro rallies as dollar fails to break through top of range
- Employment report to set short term tone for greenback
Carney signals tighter monetary policy
The markets complacency was shattered as Carney was more bullish about the economy and more hawkish on interest rates than he has been for some time. Of course, his words carried the standard Brexit caveat, but a market already prepared to buy Sterling following two possible breakthroughs in the Government’s dealings with Brussels was caught a little unawares and short positions were liquidated.
It seems traders are still of the opinion however that a hard or no-deal Brexit is a likely outcome from the negotiations. There has been no follow through or comment from Brussels about either a deal on Financial Services or the possibility of a divorce agreement being completed by November 21st. While short positions have been liquidated, there is no sign that the market is prepared to be long of the pound with continued uncertainty over the terms of any deal.
The pound reached a high of 1.3036 versus the dollar yesterday following its second largest rally of 2018 and settled back a little to close at 1.3005.
Euro rallies despite continuing concerns
It seems that Italian Prime Minister Giuseppe Conti and his two radical deputies have no intention of complying with the EU Commission and instructing the Economy Minister to make any changes to the budget. Conti has labelled criticism of the budget “an attack not on his Government but the Italian people”.
The Nationalist Government in Rome wants to end austerity which it believes has been unfairly tough on Italians by lowering taxes and raising welfare payments.
The threat to the entire EU is clear and while Rome continues to prepare for conflict, Brussels needs to tread carefully since it is unlikely to get what it wants regarding a reduction in either the budget deficit, or the debt to GDP ratio which currently stands at close to 138%. Brussels cannot allow the growth and stability pact to be so blatantly ignored but neither can it afford to push Italy into such a corner that it’s Government considers a departure from either the single currency or the EU itself.
A breather or a correction?
The dollar faces its own significant drivers over the next few days as first the employment report is released today, and the midterm elections take place of Tuesday.
Some attention will be focused on the possible adjustment to the September headline figure today as traders look for confirmation of the effect of recent storms on the data or whether this is the first sign of a slowdown in employment growth. With wage inflation likely to break 3%, it will take a poor figure, something below +160k to damage the dollar, particularly if there is a revision to September’s number also bringing it close to that level.
The dollar index fell to 96.20 yesterday closing at 96.31 following disappointing manufacturing data. The ISM report on manufacturing still shows significant expansion in the sector reaching 57.7 in September but it failed to reach market expectation for a 59 read following last month’s 59.8.
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.”