Daily Market Brief 31 October 2017

Pound higher as Euro Struggles

October 31st: Highlights

  • Rate hopes underpinning Sterling
  • Euro suffering twin headwinds
  • Dollar losing ground as Trump aides arrested

Sterling climbs to one month high

During its entire twenty-five-year history the Bank of England’s Monetary Policy Committee has not raised rates with growth as weak as 0.4% quarter on quarter. That having been said, the global macroeconomic landscape has changed out of all recognition since the last time the Central Bank even raised interest rates.

The hope for a 25bp hike in rates at this week’s meeting has underpinned Sterling for some time, providing protection against the prospect of a “no-deal Brexit”. The pound rose to fresh one-month highs against euro yesterday as the bubble burst on the market’s positivity towards a currency that is now facing political issues and a dovish Central Bank. The Euro fell to 1.1372 before settling back to close at 1.1336. The scope for any continuation of the rally is entirely dependent upon the Bank of England decision and the comments following the meeting from Governor Mark Carney.

Carney has been firmly in the dovish camp using hawkish rhetoric only to provide support to the pound. Any comment that the rate hike was to reverse the “knee-jerk” cut following the Brexit referendum or that this will provide greater flexibility were a hard Brexit become likely will send the pound lower. The support provided by tighter monetary policy will disappear if the market is convinced that this week’s hike (if it happens) is a one-off.

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Euro Looking to growth data for support

Today’s release of preliminary Q3 growth data for the Eurozone may provide a little short-term support for the single currency. However, the perfect storm of low inflation, a dovish Central Bank and growing political issues will lead to further weakness.

Eurozone wide GDP is expected to have grown by 0.5% in Q3 a shade lower than in Q2 but year on year a respectable rise of 2.6% is likely. The issue facing ECB President Mario Draghi is that growth is not consistent, and he believes the weakest economies deserve support as the stronger ones (Germany) concern themselves with the possible inflationary effects of low rates and a weaker currency.

The political situation in Spain, is of little consequence to Brussels in the short term particularly since Catalonia is pro-EU. However, there are several regions that are looking for inspiration to start their own secession acts and the tough stance being adopted by Madrid could be mirrored across Europe.

The Euro found support at lower levels versus the dollar yesterday reaching 1.1593 before bargain hunters took it back above 1.1600, closing at 1.1658, although further rallies will run into selling pressure close to 1.1680, the previous strong support level.

Russian Election interference issue returns to haunt Trump

The dollar index lost a little of its recent shine yesterday as the issue of Russian interference in the Presidential election returned. Two of President Trump’s aides were arrested on charges of money laundering. Neither the President or his campaign were mentioned in the arrest, but the dollar index lost 0.75% from its recent high following the announcement.

Trump has made no comment yet regarding the arrests.

The dollar is also being negatively affected by reports that Trump is favouring the choice of Jerome Powell as the new Chairman of the Federal Reserve. Powell is more dovish than the other candidate, John Taylor. Powell has been a Federal Reserve Governor since 2012 and is seen as continuing the policies of Janet Yellen, while the appointment of Taylor would most likely lead to a more subjective Fed with little room for pre-emptive action.

Elsewhere, the Bank of Japan, as expected, following the re-election of Shinzo Abe as Prime Minister, left interest rates unchanged.

The AUD fell following the announcement of weaker than expected manufacturing data from China. The AUD is often used as a more liquid proxy for the CNY since Australia exports such a high proportion of its raw materials to China.

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.”