Daily Market Brief 25 October 2017

Growth Data to Confirm Slowdown

October 25th: Highlights

  • Data to bring further doubt over rate hike
  • Sterling close to recent lows
  • Taylor favourite to get Trump nod as Fed Chair

Vulnerable pound suffering crisis of confidence

In a poll of analysts conducted yesterday by Reuters, 72% of those asked said they believed that the Bank of England would hike rates at its meeting next week. This would be the first rate increase in ten years but the majority also felt that it would be the only such move in the next year.

Jon Cunliffe, the Bank’s Deputy Governor responsible for financial stability commented yesterday that he felt that a rate hike is an “open question”. That is what can only be described as a “non-comment” and leaves him firmly sitting on the fence. The definite MPC doves hold three votes currently with hawks holding two.

The fence sitters include the Governor and Chief Economist. Governor Carney is most probably going to want to leave rates unchanged despite his comment that rates will need to rise “in the coming months”. Chief Economist Andrew Haldane said recently that the twin dilemmas of pay and productivity are close to being solved and backed Carney’s words about a rate hike in the coming months.

The pound is suffering, trading close to two-week lows reaching 1.3113 versus a resurgent dollar. The rate hike question will dominate traders’ minds for the next week, then once a decision is made, they will move on to the next hike, which may be a very long time coming.

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Growth data to provide further evidence of Brexit led slowdown

Today the U.K. releases the first preliminary cut of GDP for the third quarter. From being the fastest growing economy in the G7 prior to the Brexit referendum, the UK, has fallen to last place. The pay and productivity issues that concern the Bank of England’s Chief Economist are being exacerbated by the lack of business investment driven by the uncertainty the Brexit negotiations have brought. Until there is some certainty over access to the single market, SME businesses, in particular, are wary of committing to fresh investment.

The economy is likely to have grown by just 0.3% in the three months to September, the same rate as in Q2. The year on year figure of 1.4% will be 0.1% lower than the previous release which adds to the dilemma facing the Bank of England next week.

The pound again fell against the Euro as traders looked towards the ECB meeting tomorrow. President Mario Draghi has said that the Governing Council will be considering tapering the Asset Purchase Scheme put in place to counteract the financial crisis. A rate hike is out of the question tomorrow or in the foreseeable future as Sr Draghi and his colleagues await fully self-sustained growth across the whole region.

Trump favouring more hawkish Fed Chair

Amid another row with two Republican Senators, President Trump visited Capitol Hill yesterday to, remarkably, seek the views of Congress on the next Chairman of the Federal Reserve. Having interviewed current incumbent Janet Yellen last week Trump appears to have ruled her out leaving Stanford University Economist John Taylor and current Fed Governor Jerome Powell as the favourites. Taylor is the more hawkish of the two advocating a simple, rules based, view of monetary policy which if it had been applied over the past year would see the Fed Funds rate at closer to 2% than 1%.

During his visit, President Trump managed to become embroiled in a row with Senator Bob Corker who accused the President of “telling untruths”. Trump responded in his usual manner and the outcome was further loss of support for his fiscal reform bill which needs all the help it can get.

Support for the hawkish Taylor offset the spat to a certain degree although Trump’s ability to work with Congress over the remainder of his term is severely impaired.

The dollar index remains in a very narrow range testing 94.00 yesterday before falling back a little to close at 93.95.

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.”