The Iron May-dy not so tough
Political uncertainty is overshadowing stronger-than-usual industrial production and trade balance data which was released on Friday. Similarly, weakness in the treasury yield is being ignored, which, in turn, has been detrimental to the Pound.
The GBPUSD pair reversed sharply from near one-week highs and witnessed a 40-pip fall shortly after the early morning trading session opened as investors reacted to the weekend’s political headlines from the UK. The report published by The Times explained how 40 members of the Prime Minister’s Conservative party signed a letter of no confidence regarding Theresa May’s leadership. As a result, all eyes are now on the Brexit issue again ahead of the key UK Consumer Price index (CPI) and jobs data due later this week.
Overall, the sentiment around Sterling remains weighted by looming Brexit concerns, especially after the EU’s Chief Brexit negotiator, Michael Barnier, noted that the EU needs an answer within two weeks on the Brexit financial settlement. Meanwhile, the latest report by Visa showed that UK consumer spending dropped at the fastest annual pace seen in over four years, which also contributed to the weakness found in Sterling.
The week ahead promises to be a big one for Sterling with labour, inflation, and retail sales reports scheduled for release.
The US Dollar index struggled to gain early last week and, in turn, the Greenback’s losses could be attributed to the yield curve flattening. The difference between the US 10-year yield and the two-year yield fell to 67.8 basis points on Nov. 7; the lowest level since Oct. 31, 2007. The narrowing spread indicates concerns about low inflation and low prospects of faster Federal Reserve (Fed) policy tightening. Thus, USD weakens on yield curve flattening and vice versa.
In the meantime, concerns over the corporate tax cut being delayed until 2019, which have been the main reason why the Greenback suffered over the weekend, eased a little after US Treasury Secretary Steven Mnuchin’s comments. Mnuchin said there were minor differences between House and Senate tax bills and they were looking for ways to reconcile them.
This week, the CPI data on Wednesday will be the main driver for the Dollar’s price action. It is thought US headline inflation may dip back following a fall in gasoline prices. However, pipeline pressures are continuing and the market is optimistic about the outlook for core inflation, which has been surprisingly weak of late.
The Euro proved a mixed bag against its peers as the early stages proved to be a Dovish outlook from the aftermath of Draghi’s quantitative easing (QE) plan. However, as the week progressed and firm data justified the beginning of winding in Draghi’s plan, the Euro recovered from those losses.
With speeches from European Central Bank (ECB) members last week, a further rate hike before the end of 2018 has not been made likely but a growing split between the hawks and doves of the ECB has been made clear. This divergence is forming as the number of members in support of dropping QE rises.
Today’s market mover for the Euro resides in ECB’s vice president Vitor Constancio speech in Frankfurt. Otherwise, a busy week for the Euro as Gross Domestic Product (GDP) data on Tuesday is coupled with a speech from Draghi. German inflation data will also be watched that day as there are expectations of HICP data to remain at 1.5%; this will support the doves’ argument. Finally, CPI data will keep investors on their toes Thursday whilst Draghi will end the week on Friday with a speech.
Data To Watch:
07:00 EUR Wholesale Price Index (MoM) (Oct) – Germany
07:00 EUR Wholesale Price Index (YoY) (Oct) – Germany
09:00 EUR ECB Vice President Vitor Constancio speech
19:00 USD Monthly Budget Statement (Oct)