Daily Market Brief 23 October 2017

Optimistic May Boosts Sterling

October 23rd: Highlights

  • EU to consider December start for phase two
  • Rate hike in the balance
  • Risk appetite returns as U.S. clears way for tax reform

One small step for Theresa

In her address to the EU Heads of Government on Friday, British Prime Minister Theresa May reassured them that they shouldn’t be concerned about the U.K. honouring its financial commitment to the bloc once Brexit takes place.

This concession drew a very vague response from EU Council President Donald Tusk who confirmed on social media that they would begin preparations to move into the second phase of Brexit talks in December. Despite being just about as vague as he could get away with, Mr Tusk’s words provided some optimism for Sterling which rose to 1.1190 versus the single currency in response.

There is clearly a long way to go before talks about the future relationship can begin but at least both sides can be optimistic given the outcome for the summit.

This week the opposition Labour party will try to encourage dissident Conservative Members of parliament to join them in a revolt to force a binding Parliamentary vote on the final deal with the EU. Having seemingly quelled, for now, the calls for a leadership election Mrs May now faces a further problem with backbenchers. A defeat for the Government over this or any of the other amendments to the Bill could bring about a vote of confidence in the Government.

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U.K. data illustrates reality of rate hike

Last week’s macroeconomic data releases in the U.K. muddied the already murky waters of a rate hike at the next MPC meeting even further. Inflation as expected reached 3%, a month earlier than had been expected by the last Quarterly inflation report. Commentators now expect the peak, close to 3.5%, to be reached by year end.

The employment report showed that, as mentioned by MPC member Silvana Tenreyro, inflation is being caused by the continued weakness of the pound and that this should, in her words, subside within a few months. The new Deputy Governor of the Bank of England, Dave Ramsden, is in accord with Ms. Tenreyro in his opinion of a rate hike. The votes of these two plus arch-dove Gertjan Vlieghe should be sufficient to offset any renewed hawkish sentiment among the remaining members.

It will still be a close call however and several analysts still believe that the hike will happen, but it will be a one-off, reversing the knee-jerk cut following the Brexit referendum and not the first in a series. This begs the question “what good with one 25bp hike do”? The answer to which is probably “wait and see”.

Growth Data and fiscal reform to provide impetus to dollar

The dollar made its biggest gain in six weeks on Friday as optimism grew that finally one of President Trump’s election pledges was about to be fulfilled. Fiscal and economic reforms were promised and now Senate approval of a budget blueprint on Thursday for the 2018 fiscal year cleared a critical hurdle for Republicans to pursue a tax-cut package without Democratic support.

This should be the prelude to a series of economic policy changes as well which should see the light of day early in the new year certainly no later than Trumps State of the Union address.

The dollar index reached a high of 93.78. Still shy of the pivotal 94.00 as the currencies most associated with risk aversion, the JPY and CHF were the biggest lowers. The Japanese election is unlikely to have any major consequences for the currency which has grown accustomed to extremely accommodative monetary policy and low inflation.

Next week sees the release of preliminary Q3 GDP data on both sides of the Atlantic. While the U.K. is likely to remain in the doldrums there is some optimism in the U.S. A final read of 3% for Q2 has encouraged analysts to look for close to 4% for the final cut but for now the first preliminary read is likely to be between 2.60% and 2.80%.

This week’s events of note

The result of the Japanese election will be known. Little reaction is expected to the result.

  • Eurozone: Consumer Confidence – A weak read for September likely to be reversed.

  • Eurozone: Purchasing Managers indexes – Comfortably in growth territory. Manufacturing output growing steadily
  • United States: Purchasing Managers indexes – Services performing better than Manufacturing.but growth limited in both.

  • United Kingdom: Q3 GDP (Prelim) – NIESR data predicts a 0.3% QoQ increase and a 1.5% YoY figure. Any deviation higher could affect the MPC decision.
  • Canada: Rate Decision – No change expected after earlier tightening.
  • Eurozone: Rate Decision

  • Eurozone: Rate Decision – No Change to interest rate but an acceleration of the reduction of asset purchases is possible.
  • Eurozone: Draghi’s News Conference – Some advance nice on attitude to tighter monetary policy.

  • U.S. : Q3 GDP (Prelim) – Q3 GDP (Prelim)

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.”