Hopes of Brexit deal see Pound post best day of gains in months

Today’s macro highlights:

• EUR - Eurozone Unemployment (August)

• GBP - Consumer Credit (July)

• USD - PCE Deflator (July)

A glimmer of progress in the Brexit negotiations yesterday saw Sterling bound higher, delivering its best day of gains over the Dollar since January, whilst the jump against the Euro was the most impressive in almost a year. Although the move started whilst Brexit secretary Dominic Raab was being questioned by members of the House of Lords, the catalyst for the rally was a statement from the EU’s chief negotiator. Michel Barnier said that the trading bloc was prepared to offer the UK an ‘unprecedentedly close relationship’ - words that provided some much-needed support for the beleaguered Pound.

However, with Raab and Barnier due to meet in person on Friday, the temptation to extend these gains in the short term could prove rather limited. There’s certainly a risk that the devil could be in the detail, and we still have the domestic political threat of a leadership challenge in the Conservative party to contend with. It would be short sighted to believe that any corner in Sterling’s recovery has already been turned.

Brexit will it seems inevitably dominate the Pound’s fortunes in the weeks ahead, but back to the macroeconomic factors of the day and we have Eurozone unemployment set for release at 8.55am BST. This is forecast to remain flat at 5.2%, although given the generally bullish economic news that’s emerging from Frankfurt right now, a print below this number could be seen. If so, look for fresh gains on the Euro as it would reinforce the idea that the ECB won’t be in a position to deviate from the plans already sketched out in terms of monetary policy tightening.

UK Consumer Credit data is set for release at 9.30am BST and this could offer some valuable insight if there’s any meaningful deviation from the expected figure. Month-on-month contraction is expected, in line with the summer slow down in consumption that was fuelled by the better than expected weather, but anything too weak here could raise questions over consumer confidence, which is understandably being damaged by Brexit uncertainty. On the flipside, a big jump will either put pressure on the Bank of England to do more to control borrowing, or otherwise raise concerns that credit is being used to meet the day-to-day cost of living. A miss in either direction could end up weighing on the Pound.

1.30pm BST sees the publication of the US PCE deflator, which is seen as the Federal Reserve’s preferred measure of inflation. Although the Fed appears to be on course for another rate hike next month, the market isn’t quite convinced as to what will happen in December, and the pace of policy tightening in 2019 is very much open to debate, too. As such, readings such as this have the ability to provide some classic direction for the Dollar - anything below the forecast 0.2% month-on-month print could end up weighing.

GBP/USD

The Pound posted its best one day gain over the Dollar since the release of upbeat economic data back in January. Granted the pair is still well below the $1.40 we saw back then, but the move illustrates the extent to which Brexit inertia has been weighing on Sterling.

EUR/USD

Having fought its way back from mid-August lows, the pair is now struggling to break above the highs set earlier in the summer. However, we do have data expected today that could provide indications over longer term monetary policy from both the ECB and the Fed.

GBP/EUR

The Pound saw its best day of gains over the Euro since last September during Wednesday’s session, recovering the losses of the last week. UK political risk remains a concern here despite apparent Brexit progress - the infighting amongst the conservative party has the potential to continue for some time yet.