EU makes harder than it needs to be
Sterling sentiment suffered throughout Friday following the Salzburg Summit and rumours of a major statement by Theresa May meant the Pound gradually lost ground. The Prime Minister May was terse in stating the Brexit negotiations were at an impasse (on the Irish Border) and called on the EU to make concessions (or even proposals). Sterling declined sharply on her words, hitting lows below 1.3070 against the Dollar 1.1110 against the Euro. Fears of a no-deal scenario triggered the Pound’s sharpest daily decline since early 2017.
Commodity Futures Trading Commission (CFTC) data recorded an increase on speculative bets on a Sterling decline, reaching the highest level since May 2017. This increases the potential that positive political developments could trigger a sharp reversal (a short squeeze). The Labour Party conference failed to dispel uncertainties surrounding the Party line on a second referendum.
The Pound has so far failed regain much ground at market open this morning as media coverage continues to hamper Sterling sentiment. We open this morning around 1.3070 against the Dollar and 1.1147 against the Euro, as markets await an EU response on Brexit developments.
As mentioned above, May’s stern words for the rest of the EU and on Brexit effectively admitted a deadlock and the no deal scenario looks ever more likely – the Sterling fell 1.28% again the Euro on the news. Versus the Dollar the Sterling fell below the 1.1750 mark.
Eurozone PMI manufacturing came in below consensus at a two year low which hampered the progress made on Friday. Compounded by May’s statement Friday saw initial gains lost by the afternoon. This morning ECB Member Nowotny has said he wants to speed up policy normalisation, he is however considered to be more at the hawkish end of the spectrum with the rest of the members likely to be more dovish.
Data today includes German IFO numbers and the UK FPC statement and CBI Industrial trends survey, neither of which is expected to create any volatility. Most eyes are focused on Draghi who will be talking about monetary policy and the economic outlook at 14.00 today.
On Friday news from the US was mixed. US PMI data as the manufacturing sector strengthened to a 4-month high of 55.6 from 54.7. However, in contrast, the services-sector index dipped to an 18-month low of 52.9 from 54.8 amid some evidence that shutdowns ahead of Hurricane Florence had an effect. Cost pressures increased with the sharpest pace in services-sector output prices for nine years.
Unease surrounding the risk of increased costs was amplified by the potential impact of tariffs on US imports from China. Increased inflation pressure would maintain pressure for further Federal Reserve rate hikes, although there would also be potential unease surrounding US corporate earnings and medium-term US fundamentals.
Across the pond, the Chicago Fed National Activity Index will be the sole release later today.
Data to watch:
08:30 GBP FPC Statement
10:00 GBP CBI Industrial Trends Survey – Orders (MoM) (Sep)
12:30 USD Chicago Fed National Activity Index (Aug)
14:30 USD Dallas Fed Manufacturing Business Index (Sep)