The big story for markets this morning is news of the US mid-term elections. The Republican party may have held onto the Senate following gains in Indiana, Missouri, and North Dakota, but a Democratic win for the House of Representatives leaves President Trump with bigger battles to fight in Washington as he looks to continue his reform packages over the remaining two years of his term. This uncertainty is weighing on the Dollar, with the DXY index pushing down to two-week lows in overnight trade.
Moving away from US politics, yesterday also saw some pivotal events across Europe. Theresa May’s cabinet may have failed to make the progress many had been hoping for at their crunch Brexit meeting, although this doesn’t seem to have dampened appetite for Sterling. There does appear to be a timetable for progress with the idea that a conclusion can be reached by the month-end, but this does miss the additionally scheduled European Union Brexit summit which is slated for November 17th and 18th.
Across the Eurozone, a series of flash Purchasing Managers’ Index (PMI) readings were released, including the Italian Services PMI print. This came in below the break-even 50.0 mark, compounding fears over the recently released Italian Gross Domestic Product (GDP) figure and suggesting that the country could be slipping into recession. Technically this requires two consecutive quarters of GDP contraction, but with the market keen to understand how the new government’s plans are working out, more disappointing news here will do nothing to help Rome sell its deficit-busting budget plans to the remainder of the EU.
The latest UK house price data from Halifax is set to be published at 8.30am GMT. The Bank of England (BoE) is well aware of the risk posed to the UK economy from a collapse in the residential property market and this figure is expected to come in lower on an annualised basis. To an extent, the market is adjusting for factors such as Brexit uncertainty and the risk of further slow rate hikes, but a sharp drop in this metric is the sort of figure that could cause something of a shock for the currency.
Eurozone Retail Sales data will be published at 10am GMT this morning and a notable fall in the year-on-year figure is expected. This could again raise questions over the European Central Bank’s (ECB) planned timetable for removing stimulus measures and starting the process of normalising monetary policy, in turn having the potential to weaken the common currency.
Looking a little further ahead, tomorrow’s Federal Open Market Committee (FOMC) meeting isn’t expected to see the Federal Reserve change its tack over interest rates. However, the market remains upbeat about the prospect of another quarter-point hike being seen before the end of 2018. The outcome of the midterms was seen as being likely, so the changing shape of the political landscape in Washington won’t be causing any undue concern at the Federal Reserve yet.
The Pound Dollar pair hit three-week highs overnight off the back of election data from the US. We have seen something of a small reversal in recent hours, although as the day progresses, further weakness may emerge. However, given Brexit uncertainty, gains for Cable could prove short-lived.
Similarly, the common currency has found some gains over the Greenback in recent trade and no meaningful downside has been seen of the back off the Italian PMI print. Bigger questions over Europe—such as the Italian budget stand-off and the implications of Angela Merkel’s successor being able to hold together a German ruling coalition—will have the potential to act as a brake on further gains.
The Pound has pushed out to levels not seen since mid-May against the Euro, despite the absence of progress in yesterday’s cabinet meeting over Brexit. The market appears to be erring towards the idea that a divorce deal will be struck soon, despite the continued pushback over the Irish border issue – and the fact that any proposal still needs to be sold to the remaining EU member states.