Trumponomics boosting the Pound
Pound Sterling traded at its best levels in weeks against most global currencies as markets anticipate higher inflation in the UK and the potential for improved economic ties between the US and the UK. Sterling has been rising against the Euro since the start of November, but fell below 1.1600 as the rally ran out of steam. The pullback looks, at first glance, to be temporary and mild.
In her first foreign policy speech at the Lord Mayor’s banquet, Theresa May promised to make globalisation “work for all”. The latest inflation data will be watched closely today as a stronger than expected release would strengthen Sterling, especially as there would be some further pressure on the Bank of England to raise interest rates.
Last night’s comments from Dallas Fed President Kaplan continued to strongly suggest that a US rate hike would happen next week. Richmond Fed Lacker stated that a more expansionary fiscal policy (i.e. government spending) could lead to a faster pace of interest rate increases.
There was a sharp decline in US bond prices yesterday morning, with 10-year yields rising to a peak above 2.25%. The bond market has shifted gears dramatically, reflecting a US which has on the horizon a trillion Dollar infrastructure spend, tax cuts, deregulation and incentives to get $2.5 trillion of U.S. corporate capital repatriated, all courtesy of “Trumponomics”.
Deutsche Bank, the world’s fourth largest currency trader, forecasts that the Dollar will rank among the the highest-yielding currencies in the Group-of-10 nations if the Fed raises rates next month. Higher rates tend to boost the appeal of holding money in a given currency.
The US retail sales data will be watched closely on today with strong data likely to trigger further selling pressure on the bond market, although markets will be braced for further turbulence.
German economic growth had slowed to its weakest pace in a year, following the fragility of the Euro area’s recovery in a time of rising uncertainty. Head of Economic Research at Commerzbank AG stated that Germany’s economy is growing, however it is “not quite helping the ECB [European Central Bank] meet its price-growth target of 2 percent.” He highlighted that extending economic stimulus in December is more likely. Eurozone Industrial Production (MoM) printed below its previous high of 1.8%, coming in at -0.8%, above consensus. Industrial Production (YoY) struggled to beat its previous high and ended 1% lower but printed 0.5% above expectation.
In Poland, the leader of the Law and Justice Party, Jaroslaw Kaczynski, called for Poland to fight for its sovereignty in a clear swipe at the EU. This continues the theme of Anti-EU sentiment currently expressed throughout the Eurozone. The European Union may get a preview of the impact Brexit will have when EU governments tackle the bloc’s budget on Tuesday and Wednesday. Given that the UK is the second largest net contributor to EU coffers, this could reveal a degree of U.K. leverage over the bloc and future tensions among the other 27 member countries.
Data to watch: 9.30 am UK Oct Consumer Price Index, Core CPI. Retail Price Index, Oct Month on Month, Nov Year on Year. Producer Price Index. 10am UK Inflation Report Hearing. Euro Flash Q3 GDP, YoY & QoQ. Euro Trade Balance. 1.30pm US Retail Sales, Import Prices YoY & MoM. Export Prices YoY & MoM. 6.30pm Fed’s Stanley Fischer Speech.