Daily Market Brief 16 November 2017

Sterling struggling for a Foothold

November 16th: Highlights

  • Wages data confirms economic weakness
  • Pay continues to lag prices
  • US inflation data leaves rate rise in the balance
A week of major U.K. macroeconomic data releases didn’t tell traders anything they didn’t already know about the U.K. economy. Mark Carney’s denial that the rate hike earlier in the month was partly to shore up the pound seems even less true today as inflation hasn’t risen from September’s 3% and wages have done nothing to catch up with prices.

Yesterday’s employment report, where the headline can be disregarded given successive Government’s “massaging of the data”, showed that wages are becalmed despite a slight upward revision to the September data.

The pound gained a little versus a dollar suffering its own crisis of confidence (more below) reaching 1.3214 before drifting back to close virtually unchanged on the day. Against the Euro the pound fell to 1.1095 but the support held, and it recovered as traders took profit on short Sterling positions.

The fall in real wages is expected to have a significant effect on the retail sales data that is released later today. The September figure was reasonable in the current economic climate, rising by 1.2% year on year but following a fall in like for like data released last week, a fall of 0.75% in October is possible.

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Threatened Brexit rebellion fails to materialize

The Government managed to win every vote that was held over the EU Withdrawal Bill as rebels and opposition parties failed to gain sufficient support for their amendments. This will have given a marginal degree of comfort to Prime Minister Theresa May and will enable to negotiators to present a more united face to the EU in the next round of negotiations.

The votes were close with the gap as narrow as twelve votes at times, but a possible source of embarrassment has been avoided.

Brexit continues to colour every part of the economy with employers not willing to take on more staff despite the holiday period approaching as was illustrated yesterday with headline unemployment rising by the most in two years. Anecdotal evidence created by retailers already starting sales which are usually delayed until after Christmas also illustrate the onset of a potential crisis.

Until there is clarity over what the U.K. economy will looks like post-Brexit, businesses will hold a very tight rein on their “purse strings” and the outlook for business investment in 2018 could be worse than has been seen so far! The probable further delay until next March in the start of stage two of the talks will put further pressure on Sterling but, and it is a dangerous tactic, the U.K. may just prevaricate until the EU has no choice but to discuss the future relationship since their exporters are also fully invested in doing business in the U.K.

US rate hike prospects not helped by benign inflation data

The dollar index continues to drift lower as support for the greenback generated by the prospect of widening interest rate differentials fades. It spiked lower to 93.30 yesterday before recovering to close virtually unchanged as inflation data despite being a little higher than expectation proved not to be the catalyst, the market was hoping for, to see a continued normalization of interest rates.

Successive members of the FOMC have commented over the past few days of their concern over the future path of inflation as the Fed tries to embark on a move towards higher interest rates and the withdrawal of stimulus.

Yesterday’s headline inflation figure of 1.8% will provide an excuse if not a reason for higher rates at the December FOMC.

Investors see dollar strength returning as a product of higher rates and any dovish comments following that meeting will have a profound effect on the dollar’s prospects for 2018. With the U.K. unlikely to be able to hike again next year and the Eurozone seeing decent low inflation growth, several economists’ projections will need to return to the drawing board.

Region-wide inflation data will be released today for the Eurozone with the headline unlikely to reach 1.5% year on year. This will confirm Sr. Draghi’s vision despite mutterings coming from a few members of the ECB Council about increasing inflation in the new year.

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.”