November rate hike almost fully priced in
Sterling gained support throughout Friday from increasing optimism surrounding Brexit negotiation outcomes. Reports emerged that individual EU countries were making their own preparations for trade talks with the UK. GBPEUR was trading around 1.1210 and then tested the 1.1235 resistance area in late trading. There was significant resistance close to 1.3340 against the Dollar but Sterling dropped to below 1.3300 in the afternoon session.
Mark Carney, the Governor of the Bank of England (BoE), stated that tolerance is wearing thin for UK inflation running above the 2% target. Carney repeated that a rate hike would be appropriate, and increasingly likely in the near future, adding that the health of the global economy would accommodate the move. The rhetoric continued to signal a potential November rate hike.
Uncertainty continues to increase around the Brexit negotiations ahead of the EU summit meeting on Thursday, and Theresa May is set to meet key EU officials on Monday as Sterling held a firm tone with GBPEUR trading below 1.1235.
On Friday, a large book of data was out for the Dollar, combined with a speech from Yellen. Headline US retails sales were not able to achieve expectations of a 1.7% gain despite the firm reading at 1.6%, but underlying data did exceed consensus forecasts with a 1.0% gain.
Further, headline CPI data was marginally weaker than forecasts as the data showed an increase of 0.5% for September against expectations of 0.6%. Energy prices growth was in check with the annual rate unchanged at 1.7% and underlying growth being held to a 0.1% increase, marginally lower than forecasts. Prices for the month, however, did rise sharply.
The University of Michigan consumer confidence index, a survey to assess consumer sentiment on the business climate, personal finance, and spending showed a firm increase from 87.2 in September to 101.1 for this month. The highest level it has been for 13 years.
Finally, Fed Chair Yellen on Friday stated how inflation had taken her by surprise, and her best guess was that she expected the US economy to grow and gradually increase interest rates.
EURUSD is seen wavering within a tight range roughly around the 1.1800 level, having extended its losing streak into a third day today on the back of the latest European Central Bank (ECB) headlines on QE and Draghi’s speech on Friday.
The Euro accelerated its decline following some ECB policymakers hinting a Quantative Easing limit of just over EUR 2.5 trillion. Meanwhile, ECB Chief Draghi’s comments on Friday noted that a very substantial degree of monetary accommodation is still needed, which in turn continued to dampen the sentiment around the common currency.
The ECB meeting on October 26 is the next key policy focus as far as the Euro is concerned. The ECB is expected to reduce the number of assets it buys starting next year, while officials may try to facilitate a dovish interpretation of its tapering.
Catalonia nears the five-day deadline to confirm whether they want to declare independence later today, as offered by the Spanish PM Rajoy last week. Meanwhile, the ANC Leader Sanchez noted earlier today that Catalan’s reply to Spanish PM Rajoy will be clear. We await more news today.
Data To Watch:
7:00 German Wholesale Price Index, MoM 0.6%, YoY 3.4%
10:00 Euro Trade Balance, SA and NSA
13:30 Canada – Bank of Canada Business Outlook Survey
19:00 US Monthly Budget Statement
19:00 Euro ECB’s Lautenschläger speech
22:45 NZ Q3 CPI, QoQ & YoY