Politics and the Law
The UK Supreme Court began the hearing on the lawfulness of parliament’s prorogation, with a decision estimated to arrive on Thursday or Friday. Sterling benefitted from an improved global risk appetite and hovered around 1.1300 against a firm Euro and pushed above 1.2500 on the Dollar. Reports also emerged that Boris Johnson told his Cabinet that that there is a Brexit deal to be done and that talks needed to be accelerated.
Sterling corrected slightly this morning ahead of the latest UK inflation data. There is also some caution ahead of tomorrow’s Bank of England policy meeting with short-term bond yield spreads providing an element of Sterling support.
The US Dollar Index was seen yesterday morning with oil prices seeming to have stabilised following yesterday’s surge to a five-month high.
The FOMC is expected to take centre stage tomorrow when it concludes its two-day meeting. As a result, it is expected that currency movements to be restricted within recent ranges. The US session will see the release of capacity utilisation rate and the market is anticipating an improvement in industrial output for the month of August.
US industrial production increased 0.6% for August after a 0.1% decline previously and above expectations of a 0.2% gain as manufacturing output increased 0.5%. The September NAHB housing index strengthened to 68 from a revised 67 previously. There was further tightness in the Fed Funds rate and the Federal Reserve (Fed) conducted overnight repo operations in order to relieve the pressure for the first time since May 2016. The operation had a significant impact in pulling overnight rates lower and the dollar moved significantly lower.
Markets are braced for today’s Fed policy statement with strong expectations of a 0.25% rate cut to 2.00%. The statement together with updated interest rate forecasts from individual FOMC members and Powell’s rhetoric will be crucial for dollar direction. A lack of dovish rhetoric would tend to boost the dollar, although there would be strong criticism from the Administration.
The German ZEW economic sentiment index recovered to -22.5 for September from -44.1 previously and above consensus expectations of -38.0. The Euro-zone index also improved, although there was a decline in the German current conditions index which dampened any positive impact as underlying growth concerns persisted.
After bottoming at the 1.0990 mark at the beginning of the week, The Euro managed to regain composure and advance against the Dollar to the 1.1070 region close to where it currently sits, where it currently seems to be facing some moderate pressure. Renewed USD weakness helped the pair to fade the drop to the sub 1.10 region amidst a lack of relevant headlines and data releases from both sides, while investors appear to have fully taken in the ECB’s event and are now focused on the upcoming FOMC meeting. It is worth reiterating the market expects the Fed to cut interest rates by 25 bps against the backdrop of Powell’s ‘mid-term adjustment’.
Data to watch
09.30 GBP – CPI
09.30 GBP – PPI
10.00 EUR – Final CPI
13.30 USD – Building Permits
15.30 USD – Crude Oil Inventories
19.00 USD – Federal Funds Rate
19.30 USD – FOMC Press Conference