Brexit See-Saw Drives Fragile Pound
October 17th: Highlights
- Traders trying to sort opinion from fact
- Today’s focus is on inflation data
- Trump to meet Yellen as speculation grows about her replacement
May in Brussels to accelerate Brexit process
The usual political niceties were observed and the well-worn phrases used. The talks were “constructive and friendly” and negotiations “should accelerate over the coming months”. Hardly earth-shattering revelations and the pound has reacted accordingly. Its recent hiatus, as little progress was being made between Barnier and Davis, has continued with ranges becoming narrower. The pound has traded between 1.3075 and 1.3375 versus the dollar over the past week and 0.8898 and 0.9034 against the single currency as Brexit hopes have been balanced by fluctuating expectations of an interest rate hike on November 2nd.
The frustrations being felt by both sides in the Brexit negotiations look more likely to continue since there is very little common ground over the key issues for a breakthrough to be possible without a major concession.
Headline inflation to reach 3%?
The last BoE Quarterly Inflation Report predicted headline inflation would reach 3% in October but it now seems probable that it will be one month out with today’s September report to show prices rose by 3% up from 2.9% in August.
The dilemma of imported inflation is that a single rate hike is like putting a “band aid on a fracture”. It is neither the correct treatment nor likely to heal the problem. The nature of the market is that the expectation for a rate hike is provide more support than the hike itself.
BoE Governor Carney would prefer to leave rates on hold for as long as possible and he is backed by analysts who are calling for the Central Bank to remain on hold for another year given the potential turbulence that a tougher stance on Brexit could bring. Damned if they do, damned if they don’t, one thing is certain, the vote is unlikely to be 7-2 in either direction.
Trump considering several potential Fed Chairman
Given that a December rate hike is virtually “nailed on” traders are looking beyond the end of the year and since it is impossible to gauge the mood of FOMC when its makeup is probably going to change, the only thing to do is to revert to the possible policy consequences of the election of several candidates whose names are “in the frame”.
The dollar index, which measures the performance of the greenback versus the currencies of six of its trading partners, has fluctuated between 94.20 and 92.20 for the past month or so lacking the impetus for a sustained rally but gathering support from the growth that is being seen in macroeconomic data.
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.”