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Sterling hits post-referendum peak

Sterling hits post-referendum peak

GBP
In a speech on Friday there was a significant shift in stance from Bank of England Monetary Policy Committee (MPC) member Vlieghe who stated that the appropriate time for an interest rate increase might be within the next few months. He had been very cautious about the outlook and potential for a tighter monetary policy, but his view has changed due to resilience in growth and evidence of a stronger pace of wage, growth as well as higher-than-expected inflation.

Given that Vlieghe has been one of the most dovish members; his shift in tone further increased expectations of a near-term increase in interest rates and triggered a fresh Sterling surge. The UK currency pushed to 14-month highs above 1.3600 against the Dollar before a limited correction while GBPEUR was trading at levels of 1.1363 for the first time in over two months.

Markets will continue to monitor Bank of England comments closely in the short term with Carney due to speak on Monday. Political developments will also be important with Prime Minister May due to deliver a key Brexit speech on Friday. Sterling held firm this morning with the Euro trading just below 1.1363.

USD

The latest US retail sales data was weaker than expected last Friday with a 0.2% headline loss for August compared with expectations of an increase of 0.1%. The impact on trader sentiment was limited, however, by uncertainty over the impact of hurricanes Harvey and Irma, especially as a dip in auto sales could be reversed over the next few months. Similarly, almost all of the 0.9% decrease in industrial production for August was linked to temporary production shutdowns due to Harvey.

At the back end of last week, Cable was mainly dictated by events across waters in the UK as the Pound strengthened, sending the pair higher to close in the 1.3590 region. Against the Euro, the pair ended the week near 1.1945, fractionally lower than what the rate began the week on.

There is no data of note out today for the Dollar but, across the week, the key event is Wednesday’s FOMC meeting. The FOMC is likely to announce commencing its gradual balance sheet tapering (Q4) whilst keeping its Federal Fund rate (the interest rate at which a depository institution lends money) unchanged due mainly to too-low inflation. Most attention, therefore, will go to the rate projections.

EUR

The Euro advanced against the Dollar to highs near 1.1980 before fading slightly to approach the 1.2000 area given expectations that the European Central Bank (ECB) would be cautious in removing monetary stimulus. The ECB focus now moves to the 26th October meeting, just days after the debt ceiling crunch was delayed to December and, in the near term, markets will focus on primary, geopolitics, hurricane season and the 20 Sep FOMC.

The ECB is expected to announce a 12-month gradual tapering programme shortly. This tapering process is also expected to be data independent once announced. We continue to expect the ECB to maintain its dovish bias, noting it has the option to increase the APP in an adverse scenario.

The latest polling makes for pretty grim reading for Germany’s SPD and its leader Martin Schulz. Support has fallen to 20%, over 17 percentage points behind Angela Merkel’s Christian Democrats (CDU/CSU), and well below the 25.7% it achieved in the 2013 election. While coming a poor second in what has been a tepid election campaign is not a surprise, the bad polling increases the probability that we will see an end to the CDU/CSU/SPD grand coalition of the last parliament.

Data To Watch:
10:00am EUR Consumer Price Index – Core (MoM)(YoY) (Aug), Consumer Price Index (MoM) (YoY) (Aug)
3:00pm USD NAHB Housing Market Index (Sep)
3:30pm EUR ECB’s Lautenschläger Speech
4:00pm GBP BOE’s Governor Carney speech

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