Can Carney navigate the headwinds?
Political tensions continue to constrain Sterling although volatility yesterday was low by recent standards. David Davis, former Brexit Secretary, commented that he did not expect a leadership challenge to Theresa May but intense speculation surrounding the number of votes needed to trigger a challenge remained. Sterling was unsettled by Theresa May’s opposition to an extension of the transition period and uncertainty remained extremely high. Michel Barnier requested calmness from the EU side and offered some backing for the UK government on the longer-term framework. Spanish concerns on Gibraltar caused Sterling to dip sharply during the European session although a very large Euro buy order limited the fallout. The DUP refused to back the government on the Finance Bill amendments despite a confidence and supply deal, and underlying tensions remained extremely high.
This morning the Pound opens at 1.1227 against the Euro and 1.2864 against the Dollar. Today’s focus will be the Bank of England’s Inflation Report Hearing, Governor Mark Carney and several MPC members’ testimonies on inflation and the economic outlook might affect Pound sentiment and inject further volatility.
The US Dollar is generally weaker against a basket of currencies today as the Federal Reserve (Fed) struck a less aggressive tone than it has recently. It is suggested that the Fed’s tightening days may be numbered – and with that, the end of the US Dollar’s strength.
The US NAHB housing index declined significantly to 60 for November from 68 previously with sentiment undermined by affordability issues. The figure was well below consensus forecasts of 67, the lowest reading for over two years and sharpest monthly decline for over four years which maintained concerns over the housing sector and triggered wider growth doubts.
New York Fed President Williams stated that the US economy was doing well and that the central bank will continue raising rates on a gradual path. There was no evidence of a significant shift in tone from Williams as he backed a December rate hike which limited further Dollar selling, although there was a slight dip in expectations of a December rate hike to just below 70% from 75% last week. These doubts surrounding the economy and Fed policy curbed Dollar support, especially with concerns that losses in the technology sector would curb potential capital inflows.
In the US, housing starts and building permit data for October is due. Recently, the housing market has looked a bit shaky, but numbers for September were probably influenced by the hurricane season. As such, we will keep an eye on whether we see a recovery in October and the coming months.
Eurozone current account data revealed a surplus of €17bn in September, missing forecasts, although the annualised surplus totals 3.1% of GDP, a very strong structural surplus which will support the Euro. Volatility in Italian bonds shows political concerns remain significant. The Italian Economy Minister, Giovanni Tria, stated that discussions with the EU continue but Italy’s plans won’t change. Speculation arose that the EU might take the first step to discipline Italy over its 2019 budget deficit target by starting sanction processes on Wednesday. Overall, the Euro edged just above 1.1450 against the Dollar but failed to make any further gains
Data to Watch:
24h EUR EcoFin Meeting
08:20 AUD RBA’s Governor Philip Lowe Speech
10:00 GBP BOE’s Governor Carney speech
10:00 GBP Inflation Report Hearings
13:30 USD Housing Starts (MoM) (Oct)
13:30 USD Building Permits (MoM) (Oct)
n/a NZD GDT Price Index
15:00 EUR German Buba President Weidmann speech
18:00 CAD BoC Wilkins Speech