Daily Market Brief 10 October 2017

Sterling Climbs as Data Supports Hike

October 10th: Highlights

  • Retail Sales show consumer still active
  • Brexit deadlock unchanged
  • May planning for Hard Brexit with no deal

Pound Finds support

Traders have been searching for a reason to buy Sterling having been pushed into believing that there is imminently going to be a rate hike in the U.K. On the surface, the U.K. economy is a long way from needing a rate hike when judged just on “traditional” measures. GDP growth is falling, business investment is close to non-existent and wage inflation is stagnant. Yet, a hike is considered probable as imported inflation continues to climb and looks set to break above the 3% threshold which appears to be the “line in the sand”.

The June MPC meeting came close to hiking rates but headline inflation fell back from 2.9% to 2.6% and it is probable that Governor Mark Carney is hoping for a similar result when the data is released next week.

Overnight, like for like retail sales data was released by the British Retail Consortium and the numbers were surprisingly strong, growing 1.9% year on year in September versus 1.3% last month. This will provide further encouragement to the market as support from the consumer is vital with wage growth stalling.

The pound managed to claw back some of the losses it suffered last week finding support around the 1.3000 level versus the dollar and gaining half a percent versus the single currency to reach 0.8937

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Brexit talks begin with no new developments

There has been a distinct hardening of attitudes from both sides in the Brexit negotiations with both the UK. and EU telling each other that the next move is theirs. In truth, the slide into chaos continues. The U.K. has been considered in its desire to know what kind of relationship it will have with Europe following Brexit and the EU is determined to wring out a deal on budget contributions before any such talks can begin.

From a U.K. perspective it is entirely reasonable to know how beneficial the relationship will be before committing to a continuing major investment. The EU want to make sure that they do two things; continue to receive payments they feel the U.K. is legally and morally required to make and to illustrate to any other waverers the tough stance they will take should there be another leave referendum in the region.
The fifth round of talks began yesterday although with no fresh impetus, there is little for the Michel Barnier or David Davis to say. It is doubtful that the hard line being adopted by Paris and Berlin will have seen as helpful by either side but it does illustrate perfectly the vie, whether fact or fiction, that the EU feels it is better placed to deal with life without the U.K, than the other way around.

May briefs Parliament amid continued infighting

Theresa May, the British Prime Minister briefed Parliament yesterday on the progress that has been made in Brexit talks. She appeared to harden her stance a little and seemed to be preparing the ground for a “no deal” scenario. As the hardest of hard Brexits becomes more than just the nightmare scenario for British business, Mrs May is trying (and failing) to satisfy all sides.

Following her speech yesterday, the Government was accused by the opposition of wasting months of talks although it is difficult to see how progress can be made when the two sides are diametrically opposed on the most basic of issues. In truth it was unreasonable for the EU to place the three minimum expectations before the U.K before it had even a basic knowledge of what the U.K.’s position was. It was always going to impossible for a monetary figure to be placed on the table when neither side knew what the outcome of the negotiations could be.

Traders have become immune to the continued stalemate and have turned their attention to more tangible drivers like monetary policy although, for now, the outlook looks just as hazy!

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.”