Sterling rises as U.K. GDP beats forecast, increasing bets on a base rate rise in November, USA equities slip, as earnings miss target and tax cut doubts emerge
Sterling rose by circa 1% versus the U.S. dollar on Wednesday, as U.K. GDP for the third quarter of 2017 came in at 0.4% growth, versus the expectation of a 0.3% rise, maintaining the YoY growth at 1.5%. Investors immediately translated this result as evidence that the BoE’s monetary policy committee, now has the necessary ammunition to announce an increase to the U.K. base rate, by circa 0.25%, when they meet on November 2nd. Sterling also rose sharply versus the vast majority of its peers including the euro; EUR/GBP up circa 0.5% on the day. Whilst still down versus its key peer (the euro) in 2017, versus a basket of other minor currency pairs, the U.K. pound is up during the year. However, in terms of weighting, the U.S. dollar and euro still represent the largest counter currencies sterling is exchanged for, and are up 10% and 15% respectively, since the Brexit referendum decision in June 2016. In other fundamental news pertaining to sterling published on Wednesday, the index of services reading fell to 0.2% and loans for home purchases fell marginally.
Arguments and divisions have created another round of confusion in the USA Republican Party, which could ultimately alter Trump’s majority and therefore hinder his ambition to lower corporate and individual tax rates to some of the lowest in the developed world. Added to disappointing earnings, this consternation caused the DJIA to slip by over 100 points and circa 0.5%, whilst the U.S. dollar also fell on Wednesday, versus its main peers of euro and sterling. Gold rose, after initially falling through S1, as a risk off mood encouraged a flight to safe havens.
The drop in the main USA indices was made even more fascinating as the only high impact, hard data result of the day; durable goods orders for September, beat the forecast by a considerable distance; coming in at 2.2% growth, versus the 1% forecast. Home sales in the USA also smashed through expectation and defied a seasonal reduction; printing a stunning month on month growth figure of 18.9%, versus a 1% forecast. The fall in equities therefore provides more evidence (if necessary), that the rise in USA equity markets, since the Trump presidency win, has been due to one single, primary, factor; a promise to slash tax rates.
Other major currency movements of note concerned both the Canadian and Australian dollar. The Australian dollar fell sharply versus its peers, due to inflation missing targets; CPI falling from the 2% target to 1.8% YoY, therefore investors sold off the Aussie, on the basis that (over the short to medium term), interest rate rises are highly unlikely. As suspected Canada’s central bank announced no change to the current key interest rate of 1%. However, the Canadian dollar fell due to the dovish commentary which accompanied the decision; the BOC advised, in its forward guidance contained in its monetary policy report, that it’d remain “cautious”, with regards to its monetary policy.
EUR/USD closed the day up by circa 0.6%, breaching R2 at 1.1816. EUR/GBP fell by approx. 0.3%, resting on S1, at 0.8909. EUR/CHF, EUR/NZD and EUR/JPY reached R1, rising by (on average), 0.3% on the day. Versus both the Canadian and Australian dollar, the euro breached R3 significantly, whilst rising by over 1% on the day.
GBP/USD ended Wednesday close to R2, up circa 0.8% on the day, at 1.3264. Versus the majority of its peers sterling breached R3, posting several 1% rises on the day, as FX bets rose that the BoE will raise the U.K. base rate in November. GBP/CHF rose to 1.3118, GBP/JPY rose to 150.96, closing close to R2, retracing from R3, as the safe haven appeal of yen reappeared in the New York session.
Having breached R1 early in the New York session, USD/JPY gave up its gains, as the fall in the USA indices later in the session, caused a flight to safe haven currencies. The key currency pair whipsawed from a 0.4% rise, to close out the day down approx. 0.1% at 113.61. That safe haven appeal was replicated with a similar pattern displayed by USD/CHF. Naturally the greenback did make gains versus the Canadian and Australian dollars, due to their respective weakness.
EQUITIES AND COMMODITIES SNAPSHOT FOR OCTOBER 25th
• DJIA closed down 0.48%.
• SPX closed down 0.47%.
• Euro STOXX closed down 0.53%.
• FTSE 100 closed down 1.1%.
• DAX closed down 0.46%.
• CAC closed down 0.37%.
• WTI oil ended the day down circa 0.5% at $52.18 per barrel.
• Gold rose to $1277 per ounce, up 0.3% on the day.
KEY ECONOMIC CALENDAR EVENTS FOR OCTOBER 26th
• EUR European Central Bank Rate Decision (OCT 26).
• EUR ECB press conference after Governing Council meeting.
• USD Advance Goods Trade Balance (SEP).
• USD Pending Home Sales (YoY) (SEP).
• JPY National Consumer Price Index (YoY) (SEP).