Pound at a Crossroads
November 6th: Highlights
- Supports being eroded
- Brexit talks to recommence
- U.S. employment report supports dollar
Going into the MPC meeting, there was a sense of fragile optimism to the rise in the pound, which had touched highs of 1.1407 and 1.3300 versus the euro and dollar before the announcement. With the support provided by both the comments of Governor Mark Carney and the potential for future rises taken away, the pounds fall was precipitous. Support at lower levels has been provided by stronger than expected data from the services sector although traders will be cautious about creating long positions in the pound given the clearly dovish outlook for monetary policy and the political headwinds still in evidence.
One of the members of the MPC who voted for a hike, Ben Broadbent, commented on Friday the signal that rates who need to rise twice in the next few years, a dovish sentiment in itself, was “not a promise” and would depend on factors already well known and their effect on growth and inflation.
Brexit casts a large shadow
The negotiations recommence this week with the optimism of the comments from both sides following the recent EU Heads of Government meeting fading since there has been very little follow through. The contribution to be made to the EU budget remains the major concern and this will continue to be an issue unless there is a major concession made by one side or the other. Prime Minister Theresa May’s assertion that the EU need not be worried and that the U.K will pay what it owes sounds a little empty given the hawkish sentiment of many her Cabinet colleagues. The current political turmoil over the behaviour of a number of MP’s has allowed Mrs May to co-opt a new Defense Minister who was firmly in the remain camp and could provide support for a softer view on Brexit.
U.S. Economy continues to grow.
Some analysts were predicting that 300k+ new jobs had been created and there was some disappointment that the number came in at “only” 261k.
The only cloud on the horizon is the continued weakness of hourly earnings growth which fell from a revised 2.8% in September to 2.4% in October. This was, again, well below the optimistic expectations of analysts who were predicting a 2.7% increase although there was further good news in the revision of the September headline number from -33k to +18k and a fall in the unemployment rate from 4.2% to 4.1%.
The dollar index which becoming a more reliable guide to the strength or otherwise of the greenback itself given the factors that are driving several G7 currencies rose above 95.00 reaching 95.05, before sellers returned although continued dollar strength is to be expected given the divergence being seen in monetary policy.
This week’s events of note
The fallout from the U.K. rate decision and weaker than anticipated U.S. employment data will drive markets although a December hike in the U.S. is already discounted
- Eurozone: Sentiment and activity indexes – A steady strengthening is being seen but still not enough for Sr. Draghi
- Eurozone: Producer Prices – On the rise as the single currency runs out of steam.
- Australia: Rate decision – A vast majority of analysts questioned by Reuters see no change
- Eurozone : Retail Sales – A rebound from Septembers very weak fall in sales expected to be reversed and more
- New Zealand: Rate decision – No change expected despite recent improvement in data.
- Eurozone : Non-Monetary Policy meeting – A chance to discuss the effect of Brexit. (and arrange the Christmas party)
- Eurozone: Growth forecasts – Region Wise growth still benign. Next quarter’s forecast not expected to improve
- U.K. : Industrial and Manufacturing Production – Industrial and Manufacturing Production
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.”