Pound continues to advance as Dollar and Euro sentiment cools

Today's news headlines:

  • ‘Dollar falls as midterm results dim stimulus hopes’. Wall Street rallies after election meets market expectations. (Financial Times)
  • ‘U.K. Cabinet shown Brexit deal text as talks near endgame’. Ministers are on standby for a special Cabinet meeting within days. (Bloomberg)
  • ‘Retail Sales data point to further signs of Eurozone slowdown’. Non-food products fell 0.5 per cent in September, a result of a large decline in clothing sales. (Financial Times)

Tailwinds continue to support sentiment for Sterling with growing hopes for quick and significant progress for a Brexit deal in the spotlight. Support for the currency is further bolstered by weakness elsewhere after lacklustre Retail Sales figures from the Eurozone yesterday—which were only propped up by food purchases—heightened concerns of a slowing economy and posed fresh questions over the European Central Bank’s (ECB) monetary policy timetable. Equally, the outcome of the US midterm elections has been seen as less than optimal for the US Dollar, even if Trump’s loss of the House of Representatives was widely expected. With the pro-business rhetoric dialled down a notch, the rampant inflows into Dollar denominated assets are now expected to cool a little.

The day ahead is light on data, but the ECB’s Economic Bulletin due at 9am GMT plus the European Commission’s updated economic forecasts at 10am GMT will both draw scrutiny. There is growing evidence to suggest that the Eurozone economy is struggling as the ECB tapers its stimulus measures, so anything that points to a need to push out the end of the asset purchase programme into 2019 would have the potential to weigh heavily on the common currency.

The Federal Reserve’s Federal Open Market Committee (FOMC) also announces its latest decision this evening at 7pm GMT. There’s no expectation for any change in monetary policy, but the meeting—absent of economic forecasts and a press conference—could hold a few clues. Signs of any slowdown in the housing market and a dip in business investment may flag up concerns over the longer-term outlook, but expectations of a December rate hike are likely to be unaffected. Interestingly this will be the last FOMC meeting not to be accompanied by a press conference. From the New Year, the policy will change to see the Fed Chief Jerome Powell take questions after every meeting, rather than the four per year policy that’s adopted at present.

Sterling has been blighted for the last couple of years over the uncertainty of Brexit. However, on the basis that a mere increase in clarity over the process—rather than the exact shape Brexit will actually take—stands to buoy the Pound. Expectations are building that the currency may find itself in for something of a bounce in the near term. With media reporting that Cabinet ministers have been invited to read a near-complete text of the EU withdrawal agreement. Expectations are mounting that this can be tabled by the end of November; Sterling could remain on the front foot for a little while yet.

GBP/USD

The pair pushed out to fresh highs during yesterday’s session and is now consolidating comfortably above the 1.30 level. Any renewed talk of a slowing US economy into 2019, which in turn could take the edge off the pace of Fed rate hikes in the New Year, stands to provide Sterling with a little more support—at least until the EU responds to Brexit.

EUR/USD

Despite some support early in yesterday’s session with better than expected German Industrial Production figures lifting sentiment, gains for the common currency were unsustainable. While the pace of policy tightening in the US may now be at its peak, there’s mounting evidence to suggest that the Eurozone will struggle for a while yet to hike rates. Today’s EC and ECB reports could be instrumental in determining what happens next.

GBP/EUR

The Pound is now threatening a test of six-month highs against the Euro, and anything that increases clarity over Brexit will likely lend further support to Sterling. However, any signs of tension from Brussels could quickly reverse these gains.