Daily Market Brief 3 October 2017

More Questions than Answers

October 3rd: Highlights

  • Traders awaiting several outcomes
  • Catalonia referendum pushes Euro lower
  • EU continues to wait, but for how much longer?

Sterling on Hold

The pound lacked fresh factors to provide impetus as traders continued to reflect on the poor Q2 GDP data that was released last week and the lack of progress in Brexit talks. The dollar managed to reach 1.3256 and has continued to strengthen overnight. Versus the common currency the range has been narrower with the pound closing just 19 pips below its open at 0.8838.

The start of Q4 has not brought any fresh answers to the questions facing the U.K. economy. How much longer can both sides in the Brexit issue continue to drift with key issues still to be decided? Will the Bank of England consider the economy strong enough to survive a rate hike? The even more basic question is; is a rate hike even necessary with Sterling having weathered the worst of the Brexit fallout? What will be the outcome of the Conservative Party Conference? Will Theresa May be able to rally the Party behind her Brexit plans?

The degree of uncertainty facing the U.K. needs action with inflation likely to reach 3% this month and any further slowdown in the economy bringing a recession closer. Further delays in any comprehensive strategy that can be agreed with Europe will slow business investment even further going into 2018 and widen the gap between wages and prices.

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Political Headwinds grow in Europe

A new but not wholly unexpected development in the political factors facing the EU was the result of the independence referendum in Catalonia. A consequence of the greater integration within the EU is the “knock-on” effect of what should be purely a domestic event.

How the Spanish Government handles the delicate situation is more important than the outcome since it is almost impossible to see independence being granted. Secession movements are springing up in several European cities and regions; Sardinia, Lombardy, South Tyrol and Basque to name a few. Of course, the Basque separatist movement is probably the best known with the armed struggle having abated to be replaced by an uneasy peace.

This unwanted but not wholly unexpected development illustrates the fiercely patriotic nature of many EU members and their desire to retain national Governments and characteristics.

With the Central Governments of Germany and Italy facing difficulties a tough next six months faces the Eurozone. It would appear that “full employment” in the Eurozone will be around 10% since it has been unable to break much higher in the past few months as economic growth has returned. Should it start to vary to any large degree from country to country it could drive an upswing in unrest in the more industrial countries as free movement allows workers to travel to search out jobs.

U.S. economy beginning to show sustainable growth

The dollar continues to make ground against its G7 partners currencies as economic data released in the U.S. begins to show above trend growth. Strong manufacturing activity released yesterday was the latest pointer towards the growing probability of a further hike in rates coming in December.

Since Janet Yellen’s prophetic or possibly advance warned speech regarding the removal of data dependency from monetary policy decisions, the data has been, ironically, consistently beating expectations.

Mrs Yellen will be hearing her fate in the coming weeks. Her tenure as Fed Chair is coming to an end and it must be tough to be waiting on such an unpredictable character as President Trump to hear if you are going to be re-appointed.

Traders tend to get a little ahead of themselves when employment data is due for release, so calls for a 250k+ headline number on Friday are already being seen. Anything above 200k+ will be sufficient to see the dollar rise but analysts will be looking behind the headline for growth in wages, seen as a decent indicator of inflation.

Elsewhere, the Australian dollar has fallen overnight as rates were left unchanged and the RBA gave a downbeat view of the economy, pushing a rate hike, which has seemed to be “on the cards” for a few months, further into the future.

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.”