Bullish Brexit tone questioned, but Pound continues rally

Today's news headlines:

  • ‘The big number from the October jobs report could be bad news for the market’. Average hourly earnings may increase 3.1%, pushing the Federal Reserve into further rate hikes. (CNBC)
  • ‘EU and UK pour cold water on talk of Brexit financial services deal’. Barnier attacks ‘misleading’ reporting of supposed agreement on equivalence. (Financial Times)
  • ‘Pound climbs to day’s high after BoE comments on rate rise path’. The Bank of England’s Monetary Policy Committee struck a hawkish tone about the path of future interest rate rises if Brexit goes smoothly next year. (Financial Times)

The start of the new month was marked by notable gains for the Pound after two key UK politicians were reported as having made upbeat comments over progress in Brexit talks. Although the EU has since responded saying the talk of equivalence—the aspect which would give UK financial services companies continued access to the EU—was somewhat overstated, Sterling has continued to see upside added with a myriad of factors in play. These include yesterday’s upbeat comments from the Bank of England (BoE) over further rate hikes if a smooth Brexit takes place, and signs of concessions from Brussels regarding the contentious Irish border issue, which are bolstering hopes that a compromise can soon be reached.

It’s a quiet end to the week on the UK economic calendar, with the Construction Purchasing Managers’ Index (PMI) reading for October out at 9.30am being the main highlight. After Sterling’s recent run of gains, any disappointment could serve to rock the Pound’s fortunes. We may be seeing some positive, forward-looking signs over the UK’s post-Brexit future, but a slump in construction now would likely give traders cause for concern.

The key data releases on the economic calendar today will be the US non-farm payrolls and the accompanying wage growth data. Expectations are not only that there will be another meaningful increase in the number of people in work, but also that average earnings will post a significant move higher too. This is important because it could cause real concern at the Federal Reserve over the impact on inflation, and in turn, has the potential to heighten the odds of a December rate hike, as well as setting an aggressive path for further rate increases in 2019. The Dollar index may have been sliding since the start of the month, but news like this could easily reverse the trend.

Further developments over the narrative between London and Brussels will remain under scrutiny. However, it does appear as if concessions are starting to emerge from the European Union, acknowledging that whilst this process may still be more damaging for the UK, both sides have real risk on the table. Although progress at this level may be seen as encouraging for the Pound’s future fortunes, it does fail to acknowledge the domestic political risk that remains prominent. Securing a Brexit deal still needs to be passed by Parliament and has the potential to see Theresa May facing a leadership challenge, which would likely be unsettling for markets.

GBP/USD

Bumper gains for the Pound yesterday mean that the pair has now added three cents from the lows earlier in the week, although the recent volatility serves as a reminder of just how vulnerable the currency remains to the Brexit agenda. Any notable back-peddling from Brussels or a bumper jump in US wage data could easily knock some of these gains later in the session.

EUR/USD

The Euro has been benefitting from a degree of short-term Dollar weakness. A brief dip in US treasury yields has weighed on the Greenback’s fortunes and pushed the pair out to fresh one-week highs. However, those yields are already bouncing back and the prospect of more hawkish signals for the Federal reserve today could leave any upside looking temporary.

GBP/EUR

The Pound managed to push out to more than two-week highs against the Euro yesterday, although the light economic calendar from both the UK and the Eurozone today could leave short-term direction being primarily reliant on any nuances of the Brexit rhetoric. Mounting political risks in the Eurozone and the hawkish line from the Bank of England may have the potential to favour Sterling.