Sterling fell versus a broadly stronger dollar on Friday but managed to make ground against the Euro which is facing its own headwinds. The pound fell to test major support at 1.3070 but managed to recover a little despite concerns over the likelihood of a rate hike this week. The Interest rate futures market is pricing in the virtual certainty of a hike, but traders are looking beyond what is being labelled a “dovish hike” at the reality that this will probably be a one off.

The pound rallied against the Euro on Friday trading as high as 1.1330 and closing above 1.1300 for the first time October 2nd. Despite the markets’ discounting a hike the reality is not as clear cut as there are three almost certain votes for no change with only two definite hawks. The remaining four votes would appear to be dependent upon how strong the Governor’s argument is that now is the rate time for a “one off” tightening. Mark Carney has commented a few times recently that a rate hike will become necessary “in the coming months” and these sentiments have been backed up by his deputies, Dave Ramsden and Jon Cunliffe.

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Euro runs out of steam

The outcome of last week’s ECB meeting proved to be the catalyst for traders to decide that the bull run that the single currency has been enjoying has run its course. In 2017, the Euro has risen from 1.0340 to a high of 1.2090 but its inability to push substantially through the 1.2000 barrier had meant that long-term traders have decided that it is time to take profit on long positions. The single currency fell on Friday to a low of 1.1574 as the reality of a widening interest rate differential versus the dollar hit home. The cost of carrying a long Euro position will probably increase with the FOMC expected to hike rates at its December meeting.

Mario Draghi’s comment that the “provision of favourable financing conditions” was still necessary drew a stinging response from Bundesbank President, and favourite to replace Draghi, Jens Weidmann who believes that a definite end date should have been set to provide markets with clarity.

The more than 4% fall from the Euro’s highs will please Eurozone exporters who were more concerned about their competitiveness than about the control of inflation at home. It is the nature of such a diverse group of economies that it is impossible to provide policy that suits everyone which is why the ECB continues to favour the lowest common denominator that accommodative policy suits most members.

A busy week ahead

A perfect storm of political drama, monetary policy decisions and significant macroeconomic releases is set to make this one of the most important weeks of the year.

Brexit and the Catalonian independence decision will provide the political backdrop as Spain takes control of its would-be breakaway province. Brexit will continue to simmer with the EU demanding clarification of what “no-deal means while drawing up plans for a significantly closer Union once the U.K. departs.

Rate decisions in Japan and U.S. will serve as the hors d’oeuvres to the main monetary policy event which is the long-awaited decision of the U.K.’s MPC on interest rates. The decision is probably secondary to the comments following the meeting of BoE Governor Mark Carney about why rates were hiked (if that is the decision) and his attitude to future policy. If this is to be a single hike, then why it has taken place now will be questioned. A hike to provide future “wiggle-room” should that be required will see Sterling fall since any reason to be long of the currency will evaporate.

Finally, macroeconomic releases this week include Eurozone Q3 GDP and inflation, U.K. manufacturing and house prices, culminating in the entirely spurious U.S. employment report. Last month the U.S. economy lost an estimated 33k jobs and it is any revision to that figure more than the headline for October that the market will focus upon.

This week’s events of note

A busy week in store.The Bank of England meeting will be the most eagerly awaited in months. Eurozone GDP will add some colour to Draghi’s comments yesterday. President Trump is likely to announce the new Chairman of the Federal Reserve and the week culminates with the release of U.S. employment data for October

MONDAY

Eurozone: Sentiment indexes – Sentiment continues to improve as the ECB provides economic stimulus
Eurozone: German Inflation – Helped by a stronger currency inflation is benign silencing calls for tighter monetary policy from the Eurozone powerhouse

TUESDAY

Japan: Interest Rate Decision – One of the easier outcomes to predict, particularly since Abe’s election victory. No Change!
Eurozone: GDP – 0.6% QoQ and a 2.3% YoY rates entirely respectable despite stimulus to provide support.
Eurozone: Employment Rate – Stubbornly above 9% as the Eurozone gets to grips with what is a reasonable figure for the region as a whole
Eurozone: Inflation – As Sr. Dragi reported benign inflation negates the need for tighter monetary policy as MoM 1.5% expected.

WEDNESDAY

U.K. : House prices – A 2% rise YoY could bring a pullback in consumers support for the economy.
U.K. : Carney Speech – The BoE Governor is unlikely to give anything away about his voting decisions but may reiterate the need for a rate hike “in the coming months”
Eurozone: Manufacturing PMI – The hike is slated for December. It would be a major surprise if rates were hiked a month early unless GDP data is far stronger than expected.

THURSDAY

Eurozone: Manufacturing PMI – Continuing to comfortably denote expansion.
U.K.: Interest Rate Decision – Too close to call? We will see! Carney speech will be as interesting as the vote itself.

FRIDAY

U.S.: Employment report – Employment report

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.”

Tags:Daily Market Brief