UK still working, but are we buying?
Sterling saw some improvement during yesterday’s European trading session as we saw slight rises against both the Dollar and the Euro; the UK currency’s biggest one-day gain in a month. The UK unemployment rate held steady at 4.9%. However, there was a decrease in UK average earnings which came in at 2.3%, revised down from 2.4%. From the Bank of England’s perspective, the growth shown in UK earnings will not pose a significant threat to inflation and will not get in the way of a very supportive monetary policy system.
Brexit issues continue to cast shadows over the Pound as German officials have stated that there will be no Brexit negotiations until Article 50 is enacted. At the EU summit, Theresa May will be given just 15 minutes, over lunch, to outline her aims for negotiations. Comments from the EU summit will be watched closely and will give markets an indication of the Eurozone’s Brexit negotiation stance and, alongside UK retail sales, will be the main volatility driver today.
French President, Francois Hollande, called for the clearing of Euro denominated derivatives to move from the London Stock Exchange to the Eurozone. Britain’s Finance Minister Simon Kirby has proclaimed that moving the securities away from London, with no set agreement of trade, will put the “whole of Europe” and the UK in a deeper pool of uncertainty.
The European Central Bank (ECB) interest rate statement may cause waves across the FX markets despite no changes to the headline interest rate. Mario Draghi is expected to set the stage for a potential expansion of the bond-purchase programme next year while reiterating that the bank will do whatever it takes to meet the inflation target. The Euro will be vulnerable to further selling if Draghi takes a dovish tone, while any spike in bond yields could boost the single currency.
The US housing data was mixed with a larger than expected decline in starts offset by an increase in permits over the month. US Dollar “long positions” rose sharply as the market, fixated on the timing of rate hikes, has started pricing in a higher probability of a Fed rate increase in December. The implied odds that the Fed may end this year with a hike increased to around 68% from 59% at the end of September. The bullish case for the US dollar, however, may fade over the mid-term horizon given that the Fed may once again opt for a prolonged pause in the tightening cycle, as was the case after raising rates in December 2015.
The Dollar gradually pushed the Euro to three-month lows just above 1.0950. The recovery in GBPUSD faltered a whisker shy of 1.2300 overnight, opening this morning at 1.2283.
Data To Watch: 7am EUR German Producer Price Index (Sep). 9.30am GBP Retail Sales (Sep). 12.45pm EUR ECB Interest Rate Decision. ECB deposit Rate Decision. 1.30pm EUR ECB Monetary Policy Statement and Press Conference. 1.30pm US Initial Jobless Claims.