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Brexit means transitional period

Brexit means transitional period

GBP
September’s UK CBI industrial orders index declined to 7, down from 13 in August and, although solid growth continued, there was some evidence of a slowdown which will maintain doubts over the potential for sustained export-led growth.

Friday’s focus was Theresa May’s Brexit speech in Florence. The rhetoric was broadly in line with expectations and Sterling was vulnerable to a retreat with the PM making no breakthrough offer and lacking a specific financing offer. Overall, Sterling was vulnerable to profit taking after the talks with notably choppy trading; Sterling also slid after Moody’s downgraded the UK credit rating to Aa2 from Aa1.

The Euro rallied to highs above 1.1261 before fading while there was a Sterling dip to below 1.3500 against the Dollar. The latest CFTC data recorded a sharp decline in short, speculative Sterling positions to the lowest level since November 2015 and there is now much-reduced scope for a further covering of short positions. Nevertheless, the Pound quickly regained ground to trade near 1.3550 on Monday with the Euro close to 1.1365 and Brexit talks set to resume.

USD

The Dollar ended last week mixed after falling initially against the majority of its peers due to risk-aversion on geopolitical tensions between the U.S. and North Korea. Tensions increased after N.Korea said it might test a hydrogen bomb over the Pacific Ocean, causing the market to stir.

Further, the Federal Reserve announced last week that in October it will begin to let a small portion of its $4.5 trillion balance sheet mature without being replaced. The wind-down will total $10 billion per month and will gradually rise over the next year to $50 billion per month. Further, the central bank left its key short-term rate unchanged but implied one more rate increase this year.

This week, the Fed has a busy schedule with 12 Committee members due to speak. The commentary will give the markets a notion of current thinking in the wake of the FOMC.

EUR

Angela Merkel has secured her fourth term in office as her Conservatives (CDU/CSU) remained the largest party with 33.0% of the vote, followed by the Social Democrats (SPD) with 20.5%. However, both parties registered significant losses in their vote shares to the benefit of the eurosceptic AfD party, which will become the first right-wing nationalist party to enter the Bundestag since the 1950s, with a vote share of 12.6%.

The election result means that we will probably enter a period of heightened political uncertainty in Germany over the coming weeks as coalition talks drag on. This could open the debate in the next Bundestag. Angela Merkel dominates German politics and is increasingly important in underpinning the global rules-based system. Fresh partners in a new coalition could start to shake up the old German consensus.

Data-wise, in Germany, the Ifo business confidence for September is expected to show a further increase and add to the upbeat picture of the Euro area witnessed in the PMI data last week. Also in focus will be the European Central Bank’s (ECB) President Mario Draghi’s testimony before the European Parliament Economic and Monetary Affairs Committee. This will be scrutinized for signals over tapering the ECB’s €60bn bond-buying program and should also contribute towards determining the next leg of directional move for the cross.

Data to watch:
8:00am EUR ECB Vice President Vitor Constancio speech
9:00am EUR IFO – Business Climate (Sep), EUR IFO – Current Assessment (Sep), EUR IFO – Expectations (Sep)
1:30pm USD Chicago Fed National Activity Index (Aug)
2:00pm EUR ECB President Draghi’s Speech
3:00pm USD Dallas Fed Manufacturing Business Index (Sep)
3:45pm EUR ECB Cœuré Speech

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