Rate hike in the Balance
October 2nd: Highlights
- Slowing growth and political concerns weigh on Pound
- Government tearing itself apart over Brexit
- EU facing major political upheaval
Johnson Lights Leadership Fire
Despite the uncertainty,the pound ended Q3 at its highest level against the dollar since the Brexit referendum. Versus the common currency the pound has been mixed, the future path of interest rates has started to influence all G7 currencies. Speculation about a hike for the dollar at the Fed’s December should see the dollar firmly on the front foot in Q4. The pound has good support versus the greenback at 1.3280. Analysts are unsure whether a rate hike will happen at November’s meeting which takes place on the 2nd. That meeting will coincide with the release of the latest BoE quarterly inflation report which is likely to predict inflation starting to top out as the pound levels off and wages growth remains weak. Mark Carney the BoE Governor has confirmed that he feels rates will “rise on the coming months”.
MPC Member Vlieghe turns Hawkish
Boris Johnson, the Foreign Secretary and the “leader” of the “Hard Brexiteers” in an interview over the weekend continued to pressure the Prime minister. He had four main demands; The transition period must be not a second longer than two years, the U.K. must refuse any new European Court of Justice decisions during the transition, there must be no payments for single market access once the transition ends and there must be no agreement to shadow EU laws to gain access to the single market.
Johnson’s performance has been seen as a thinly veiled prelude to the start of his campaign to lead the party. Brexit could look very different with Johnson “driving the bus”.
EU facing major political upheaval
In an often-violent day of voting which saw more than 750 Catalans injured by riot police ordered to disrupt the process in any way they could, 90% voted in favour of secession.
The referendum was illegal since it wasn’t sanctioned by Madrid. However, there will now be a period of social unrest and defiance of Madrid. The Regional Governor said that conditions are now in place of a unilateral declaration of independence which Madrid clearly cannot allow.
As confirmation of the coalition in Germany continues to be awaited, ECB leader Mario Draghi’s caution over uncertainty that has delayed both the removal of additional stimulus and a hike in interest rates has been proved correct. The intertwined fabric of the EU now means purely domestic issues as we are seeing in Germany and Spain are affecting the other countries of the region bringing uncertainty from Tallinn to Lisbon.
This week’s events of note
A data driven week will culminate in the eagerly awaited but flawed U.S. employment report.
- U.S.: Purchasing Managers Index of manufacturing activity (PMI) – A useful indicator of future economic activity
- Eurozone: Purchasing Managers Index of manufacturing activity (PMI) – A useful indicator of future economic activity
- Australia: RBA Interest Rate Decision – No change expected as concerns return over Iron ore prices and Chinese activity
- Eurozone: Producer Prices – an indicator of future inflation closely watched by the ECB
- Eurozone: Non-Monetary Policy council meeting – The effect of the German election and Brexit progress will be on the agenda.
- U.S.: Services PMI – Non Manufacturing activity is holding steady in the U.S.
- Eurozone.: ECB Minutes – Little of note took place at the press conference following the most recent ECB Meeting so the minutes should reflect that
- U.S.: Non Farm Payrolls – Non Farm Payrolls
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.”