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Slow and gradual, starting in November

Slow and gradual, starting in November

GBP
Bank of England Governor Mark Carney reiterated that some withdrawal of monetary stimulus was likely to be appropriate over the coming months. He also remarked that spare capacity is being absorbed at a slightly faster-than-expected pace with inflation likely to overshoot the 2% target over the next three years. Carney, however, also commented that an increase in interest rates would be at a gradual pace and limited while UK growth is likely to be weaker than the G7 average until mid-2018.

The speech did not add any hawkish elements and the overall tone encouraged a further Sterling correction after very rapid gains last week. Carney, however, also suggested that longer-term Brexit implications could be inflationary. Overall, Sterling retreated significantly with a dip to below 1.3500 against the Dollar and GBPEUR rallied to 1.1300.

Sterling was unsettled slightly by reports that a top Brexit official was leaving his post to become a personal advisor to Prime Minister May, especially with evidence of growing policy rifts within the government.

The UK currency regained ground against the Dollar in the early morning session with little change against the Euro.

USD

Yesterday, the Dollar demonstrated signs of strength due to the lead-up to the latest Federal Reserve rate decision on Thursday. Cable fell just shy of a 0.7% drop, bottoming out at 1.3472 before recovering again to end the day at 1.3548. Against the Euro, the Dollar was unable to make the same gains as it did against the Pound and in fact weakened slightly to end the day just breaking the 1.2000 barrier.

The US Dollar index (DXY) is currently trading at 92.04 and up 0.2% yesterday as markets prepare for the potential of Fed Chair Janet Yellen announcing the scale back of its current balance sheet, currently sitting at $4.4 Trillion Dollars. Fed Funds futures indicate that the chances of a further rate increase in 2017 are around 58%. This leaves the Dollar vulnerable to selling pressure in the scenario of a dovish slant, a lowering of rate projections, and suggestions that a further rate increase is unlikely this year.

Today, August housing starts are projected to dip modestly to 1.150 mn after tumbling 4.8% to 1.155 mn in July. Risk is to the downside due to disruptions from Harvey. Further, Trump addresses the United Nations whom he has criticised for perceived anti-democratic and sometimes anti-US positions.

EUR

Yesterday offered a scarcity of new information on the fundamental front other than the reaffirmation of steady inflation readings out of the Eurozone, while we await additional clues with the release of the German ZEW economic sentiment today. The ZEW will release its Economic Sentiment Index for the next six months for Germany, as well as the Current Situation Index in the EU session later today, reflecting institutional investors’ opinions.

A positive headline reading may offer fresh impetus to the EUR bulls, sending the EURUSD closer towards 1.2050 levels. However, if the readings disappoint, the rate could drop back towards mid-1.1900s. It must be noted that after four consecutive months of declines, the indicator is set to improve from its prior figure, potentially acting as a factor that may support the EUR in the lead-up to the event.

Data To Watch:
10:00am EUR ZEW Survey – Economic Sentiment (Sep), ZEW Survey – Current Situation (Sep)
1:30pm USD Building Permits Change (Aug), Housing Starts Change (Aug), Housing Starts (MoM) (Aug), Building Permits (MoM) (Aug)

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