Sterling slips, as Brexit negotiations reach a critical stage, Janet Yellen’s belief that inflation will pick up, causes U.S. dollar and equities to rise

Oct 17 • Morning Roll Call • 1353 Views • Comments Off on Sterling slips, as Brexit negotiations reach a critical stage, Janet Yellen’s belief that inflation will pick up, causes U.S. dollar and equities to rise

Sterling came under pressure on Monday, as Brexit concerns appear to have reached a critical juncture. Many market commentators and those close to the negotiations, are now openly quoting that the relationship between the E.U. and the leading members of the U.K., has completely broken down. Theresa May flew to meet European Commission chief Jean-Claude Juncker, on Monday evening for dinner, in an attempt to paper of the cracks with a hastily arranged public relations initiative. However, the clock is ticking and only the belief that the UK’s inflation is rising, as will probably be confirmed on Tuesday morning, has prevented the pound from being heavily sold off.

Rising inflation will strengthen the BoE/MPC position, when they meet early December to announce their latest base rate decision for the U.K. economy, the markets are fairly unanimous that a rise of 0.25% will then be revealed. Janet Yellen and Mario Draghi are also of the opinion that inflation will rise significantly in the USA and E.U., therefore coordinated interest rate rises, between the BoE, ECB and Fed, might be a pattern witnessed in 2018, as the ECB begins to taper and USA Fed begins to unwind from their quantitatively eased, expanded balance sheets.

The U.S. dollar not only strengthened as a consequence of CPI inflation coming in at 2.2% YoY when the figure was published on Friday, President Trump met with John Taylor, a potential successor to Janet Yellen, who is regarded as more hawkish than Mrs. Yellen. Therefore the unwinding of the Fed’s gargantuan $4.5 trillion balance sheet, and the potential three rate rises suggested for 2018, in order to normalise rates to perhaps 3%, would be far more likely with his appointment in February 2018, the point at which Mrs. Yellen’s tenure ends. The SPX index closed at another record high, whilst WTI oil rose, due to rising tensions between the Kurds and Iraq. Gold rejected the critical $1300 handle, as safe haven assets were out of favour on Monday, as other commodities, in particular copper, rose sharply in value; up 3.4% to a three year high.

The euro failed to make any significant gains versus its peers, a right wing politician and party winning the Austrian election, the Catalonia issues and the upcoming ECB decisions regarding tapering of the current asset purchase programme, appeared to neutralise euro investment on Monday. A potential reduction of the ECB asset/bond purchase programme, from the current €60b per month to €30b a month, may be placed on a surer footing if, as intimated by ECB president Mario Draghi, inflation picks up quickly in the single currency bloc zone.

STERLING

GBP/USD whipsawed inside a tight range on Monday, as the various rumours and issues surrounding Brexit were discussed; initially rising in the morning European session, cable fell to S1, then recovered to above the daily pivot point, to finally fall through S1 late in the New York session, to end the trading day at circa 1.3254, down approx. 0.3%. GPB/AUD, GBP/JPY and GBP/CAD followed a similar haphazard pattern, finally ending the day close on flat. GBP/CHF ended the day down circa 0.2%, at 1.2927, recovering from a low, that initially took it through S1.

U.S. DOLLAR

USD/CAD rose through R2, to reach a daily high of 1.2557, before giving back some gains, to close the trading day out up circa 0.4%, at 1.2518. The rise and fall matched the increase of the price of oil throughout the day, given that the Canadian dollar is classed as a commodity currency it can often fall in a correlated manner, if the value of WTI oil (in particular) rises. USD/CHF rose to 0.9853, up circa 0.2% on the day. USD/JPY initially fell in the European session, but rose through R1 and closed on the pivot point level, ending the day at circa 112.17.

EURO

EUR/USD fell by circa 0.3% on the day, resting on S1 at 1.1797. This represented the only significant fall for the euro, versus its main peers on Monday. After initially falling through S1 early in the European session, EUR/GPB recovered to creep back over the 89.00 handle, closing on the daily pivot point. EUR/CHF fell by 0.2% to close out at 1.1506. Versus AUD, CAD and JPY the euro ended the day close to flat, EUR/NZD ended the day down circa 0.2%.

EQUITY INDICES AND COMMODITY PRICES FOR OCTOBER 16th.

• DJIA closed up 0.36%.
• SPX closed up 0.18%.
• DAX closed up 0.09%.
• FTSE 100 closed down 0.11%.
• STOXX 50 closed up 0.05%.
• WTI oil closed up circa 2% at $52.11 per barrel.
• Gold closed down 0.7% at $194 per ounce.

KEY ECONOMIC CALENDAR EVENTS FOR OCTOBER 17th

• GBP BOE’s Carney, Ramsden, and Tenreyro Appear Before Treasury.

• GBP Consumer Price Index (YoY) (SEP).

• GBP Retail Price Index (YoY) (SEP).

• EUR Euro-Zone ZEW Survey (Economic Sentiment) (OCT).

• EUR German ZEW Survey (Economic Sentiment) (OCT).

• EUR Euro-Zone Consumer Price Index (YoY) (SEP F).

• USD Import Price Index (MoM) (SEP).

• USD Export Price Index (YoY) (SEP).

• USD Industrial Production (SEP).

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