Global Themes

Sterling stumbles as real wages squeezed
- BOE members sound very cautious notes
- Euro uninspired by Draghi
- Fed Chair announcement could be close
- Asian politics stall global markets

BoE

Yesterday, UK inflation did rise to 3% as forecas, however the British Pound did not enjoy any benefits as Bank of England (BOE) Monetary Policy Committee (MPC) members sounded cautious remarks over the economy and raising interest rates.

This morning, UK wage growth was revealed to be lagging well behind inflation, which suggests the household squeeze continues. If consumption is depressed further, this will weigh on the British economy and possibly reduce the chance of interest rate rises in the UK. As a result, GBP/USD has fallen to a 6-day low nearer $1.31. Sterling is battling with the €1.12 level against the Euro and remains to float precariously above this handle this morning.

At a Treasury Select Committee hearing, three members of the MPC spoke and none gave the hawkish message market participants were looking for. Deputy Governor Sir Dave Ramsden confirmed he was not in favour of a rate hike at the last meeting. Silvana Tenreyro said she was open to raising rates, but only if economic data releases supported it. Critically, Governor Mark Carney warned that inflation would go above 3% in the coming weeks but raising rates to counter this in the short term may not be the best solution. He then sounded a warning on the impact on the UK and EU economy if a ‘no deal’ scenario is the result of Brexit talks.

According to Reuters there is still a 75.32% chance of a rate hike when the BOE meet on 1-2 November. This is a concern to importers – traders are betting on a rate rise based on this probability but if the BOE decide not to act on rates, we could witness a very aggressive sell off in the pound. 

EUR

Minimal data from the Eurozone economic calendar means the European Central Bank’s (ECB) conference on “structural reforms in the euro area” will be in focus. ECB President Mario Draghi kicked things off at 9:10am, however failed to inspire markets. ECB members Peter Praet and Benoit Coeure are due to speak at at 12:45pm and 3:15pm respectively. Particular attention will be on any comments on winding down the ECB’s current stimulus programme which could pave the way for a Euro positive spell ahead of next week’s key meeting on October 26th.

EUR/USD kept a familiar range yesterday still floating between $1.17 and $1.18 but after disappointing economic data released from the bloc, the common currency fell for the fourth consecutive day against the US Dollar. Final inflation figures for September came in line with expectations as consumer prices rose 1.5% y/y and 0.4% m/m. Although this is still off the ECB’s inflation target of close to 2% core inflation remains at its highest since 2013 at 1.3% y/y.

Fed

US President Donald Trump has 5 candidates to choose from to elect as Federal Reserve (Fed) Chair. Investors are betting on a more hawkish candidate replacing current Chair,Ms Yellen in February 2018 when her term comes to an end. It is expected that a new Chair will be announced in early November before Mr Trump heads to the far east.

The expectation of an interest rate rise from the Fed in December stands at 91% (source: CME Group) so traders could potentially be focusing solely on the Fed Chair announcement.

Asia

The twice a decade communist party in China kick-started this morning with a 3-hour speech from current Premier Xi Jinping highlighting the success of the party since he took power back in 2012.

Equities in Asia have remained relatively muted as investors will assess the direction and financial reforms they can expect over the next 5 years. Mr Xi highlighted that by 2050 he expects China to become a global market leader.

Over in Japan a general election will conclude on Sunday, with current President Shinzo Abe’s party expected to remain in power though recent election scares in Europe have the market participants cautious.




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