Hard Brexit fears Sink Sterling
Whilst the FTSE soared yesterday Sterling suffered with a break below 1.2800 against the Dollar and against the Euro the UK currency fell as low as 1.1366. The UK construction PMI report was stronger than expected with an increase to six-month highs of 52.3 from 49.2 the previous month.
However, the data made little impact on the negative sentiment and ongoing fears surrounding the EU exit negotiations and longer-term economic risks. Bank of England (BoE) Monetary Policy Committee member Saunders stated that although the BoE may have have overestimated the slowdown in the UK economy there will be slower growth and higher inflation. The UK service sector PMI data will be important even if the immediate market impact is limited.
US Richmond Fed President Lacker, a Federal Open Market Committee (FOMC) hawk, maintained his call for higher interest rates and stated that higher rates were essential to keep underlying inflation pressures in check and lessen the risk of a steep increase in rates later.
Chicago Fed President Evans stated that he would be ‘fine’ with a December rate increase if the US economic data continues to be firm. US data releases will have impact today with the ADP and ISM non-manufacturing data providing fresh evidence on the US economic outlook.
Near the close of play in the European session yesterday rumours surfaced that the European Central Bank (ECB) was nearing a consensus on the need to reduce bond purchases before an end to QE. A potential taper reducing the current EUR 80Bn a month by EUR 10Bn increments was mentioned.
The markets had been assuming that the ECB would look to expand the current EUR 80Bn in asset purchases beyond March 2017 and, although this option was not excluded, it was a surprise to the market that purchases could be scaled back more quickly than expected. Following this the Euro immediately spiked higher to above the 1.1200 level against the Dollar.
Data to watch: 9am EUR Markit Services PMI (Sep), 9.30am UK Markit Services PMI (Sep).1.15pm US ADP Employment Change. 1.30 US Trade Balance (Aug). US Markit Services PMI (Sep), US Markit Composite PMI (Sep), Factory Orders (Aug), ISM Non-Manufacturing.