Daily Market Brief 24 October 2017

Pound Awaits Growth Data

October 24th: Highlights

  • GDP likely to be 0.3% in Q3
  • Rate hike hopes fading
  • ECB Meeting to provide some clarity on withdrawal of stimulus

Sterling struggling for foothold

It has been a long time since the pound rallied due to anything other than rumour or rhetoric. The fragility of the economy will be illustrated by tomorrow’s release of preliminary Q3 GDP data which is expected to show that the U.K. economy grew by a paltry 0.3%. For a rate hike to even be considered in such an environment proves that perceived Central Bank logic has been abandoned in favour of a short-term fix.

The pound remained in a narrow range yesterday trading between 1.3157 and 1.3228 versus the dollar and 1.1200 and 1.1253 against the single currency.

A mix of Brexit hopes and the possibility of tightening monetary policy have supported the pound but despite Theresa May’s continued optimism, a hard Brexit is becoming the most probable scenario.

Yesterday Mrs May hailed the “important progress” that has been made in the negotiations, confident that the EU would agree to move to stage two of the negotiations by December. The vagueness of Donald Tusk’s tweet on the subject following the conclusion of discussions amongst the remaining twenty-seven members of the EU tells a slightly different story.

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Brexit: more hope than expectation

When listening to Theresa May making a speech regarding the “state of play” in Brexit negotiations, it is often impossible to sort what is agreed and what is her hope for agreement.

For example, so much has been made of the treatment of EU citizens remaining in the U.K. and the financial consideration that the third EU issue, the border between Northern Ireland and the Republic of Ireland had been virtually ignored. Yesterday Mrs May said there would be “no physical infrastructure” marking the border. It remains to be seen if that is also the view of the EU.

The implications for the U.K. economy of a hard Brexit are just now being considered. Even though at the time of the referendum, a hard Brexit was the only path available, as negotiations have continued, the aspiration of the Government to remain part of the single market has led to a watering down of the U.K.’s demands which is contrary to the wishes of those who voted leave.

The opposition Labour Party is trying to convince dissident Government backbenchers to join a revolt calling for the right to a vote on the final deal. It seems that your enemy’s enemy must be your friend, despite the political divide.

Monetary Policy, still “Tops the Bill”

The drivers of currency movements come and go; politics one-week, macroeconomic data the next, but it there is no question a Central Bank meeting particularly, when there is some doubt over the outcome that is, and will remain, the primary driver.

This week’s meeting of the Governing Council of the ECB will provide President Mario Draghi with an opportunity to provide his assessment of the state of the EU economy in its entirety ignoring the calls of individual states for policy which satisfies their self-interest.

Draghi is unlikely to be swayed from his central theme that the playing field must be levelled to cater for the weakest as well as those with the loudest voices. The Euro has stayed above major support versus the dollar as it has faced a series of political headwinds that had seemingly faded in H1. 1.1680 is the major support. Any breach of that level will have to be driven by a dollar move since there is little bad news even lurking in the medium term until the Italian election, which is to be held next May, to blow the ECB off course.

The tapering of the additional measures is going to be discussed on Thursday although a timetable for their complete withdrawal is still some way away.

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.”