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Forward guidance delivered as downward guidance

Forward guidance delivered as downward guidance

October’s UK construction PMI index rose in October to 50.8 from 48.1 previously, nudging just into expansion territory but not enough to bolster weak sentiment in the sector. Sterling ebbed across the board in advance of the Bank of England rate hike, now 0.50% from 0.25%. Although widely expected, the vote was not unanimous. MPC members Cunliffe and Ramsden highlighted sluggish wage growth as their reason for dissenting. So why didn’t the Pound rise?

Significantly, the monetary policy statement omitted repetition of references to the risks of interest rates rising more sharply than expected by markets. In fact, the message was that any future increases would be “at a gradual pace and to a limited extent”, potentially two more hikes over three years. The overtly dovish message following all the previous hype meant investors raced to reverse bets and Sterling suffered.

Sterling dipped sharply lower as bond yields declined and the Euro tested the 1.1235 area (1.8% drop) as the Pound dipped to lows below 1.3100 against the Dollar (1.3% drop).

On a lighter note, Governor Carney was also optimistic that wages growth would accelerate and that the worst of the income squeeze had already been seen. The Quarterly Inflation Report estimated inflation was likely to peak this month at 3.2% before the rate hike took effect and would gradually drift back to the 2% target.

Sterling was unable to gain any subsequent relief this morning trading near 1.3050 vs the Dollar and the Euro at 1.1200.


The US Dollar is broadly weaker today across the board as market participants keep digesting the appointment of Jerome Powell as the next Fed Chairman when Janet Yellen finishes her term in February.

In addition, the Greenback appeared somewhat disappointed after the Republican Party’s announcement about their tax bill that will slash the corporate tax rate to 20% and reduce individual income tax rates significantly. Analysts said the proposals put forth were both unlikely to gather sufficient support in Congress in part due to them adding over $1.5 trillion to the deficit, as well as being unlikely to have a significant impact on the U.S. economy.

The Federal Reserve left interest rates on hold last night as expected and continued to signal that a rate increase would continue to be “gradual”, without specifically saying when the next move would come.

Today’s US Non-farm payrolls for the month of October will be the salient point today. Consensus among investors sees the economy adding more than 300K jobs during last month, while the jobless rate is expected at 4.2%.


German unemployment data yesterday was largely in line with expectations as the unemployment rate for October remained unchanged at 5.4%. Further, in terms of numbers, unemployment declined to 11,000 for October from 10,000 in September indicating a firm labour market for the German economy. That said, Bundesbank head Weidmann, in a speech yesterday, did highlight very low interest rates poses a financial stability risk.

The Euro was subject to events in the UK yesterday as the single currency strengthened with a change over 1.5%. The Euro started the trading day above 1.1400 and closed 1.1199. Against the Dollar, further fluctuations were seen across the day but generally trading in and around the 1.1650 level.

Data To Watch:

09:30 GBP Markit Services PMI (Oct)
12:30 USD Average Weekly Hours (Oct)
12:30 USD Average Hourly Earnings (YoY) (Oct)
12:30 USD Nonfarm Payrolls (Oct)
12:30 USD Labor Force Participation Rate (Oct)
12:30 USD Unemployment Rate (Oct)
12:30 USD Trade Balance (Sep)
14:45 USD Markit Services PMI (Oct)
14:45 USD Markit PMI Composite (Oct)
15:00 USD ISM Non-Manufacturing PMI (Oct)
15:00 USD Factory Orders (MoM) (Sep)
17:00 USD Baker Hughes US Oil Rig Count

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