GBP/EUR – BoE Shafik Talks of Further Rate Cuts
Fears of a ‘hard’ Brexit, where the UK rejects single market access in order to tighten control on immigration, have weighed on GBP/EUR over the past few days. Around 5,500 firms in the UK benefit from the financial services passporting rights that accompany single market access, suggesting a ‘hard’ Brexit could cause significant problems. Business confidence has fallen for the longest stretch since the financial crisis and three-quarters of CEOs are considering, or will consider, relocating their businesses outside the UK.
Bank of England (BoE) Deputy Governor Minouche Shafik has created further woes for the Pound today after commenting that further monetary policy easing will likely be necessary. Shafik described the Brexit vote as having a ‘sizeable economic shock’, while stating that, without further stimulus, the resultant economic slowdown could become ‘something more pernicious’.
Markets largely expect another interest rate cut, perhaps to as low as 0.1%, as a result of the November meeting of the Monetary Policy Committee (MPC).
GBP/USD – Liam Fox Speech Suggests Government Confusion over Brexit
GBP/USD exchange rates have edged lower thanks to the market uncertainty surrounding Brexit. There were concerns that International Trade Secretary Liam Fox would use a speech in Geneva to push for a ‘hard’ Brexit, but opponents have largely claimed his delivery lacked any real content, despite being billed as a ‘major announcement’.
Fox suggested that the UK’s existing trade arrangements, made through the EU, will remain in place following the Brexit, without creating a ‘legal vacuum’ – although he offered no explanation to how this would be achieved.
The implication that the UK government is still struggling to establish its own position on the issue of the Brexit is keeping appetite for the Pound muted.
USD/GBP – US Dollar Recovers; Further Movement Possible on Fed Talk
Yesterday’s perception that the first televised presidential election debate was ‘won’ by Hillary Clinton lessened the odds of market jitters ahead of the November polls. As a result investors sold out of the US Dollar to hunt for yield, confident in the stability of the markets. Even a strong, unexpected rise in US consumer confidence failed to boost the ‘Greenback’.
Traders are returning to USD today as the global risk-hunt begins to slow. There is the potential for significant volatility for the US Dollar, given the contents of today’s data calendar. Preliminary durable goods orders are forecast to have fallen -1.5% in August, although considering last month’s growth surged to 4.4%, this could represent more of a market correction than falling demand.
Later several Federal Reserve officials are scheduled to make public appearances. Chair Janet Yellen will testify before a House Panel, while James Bullard, Charles Evans and Loretta Mester all have various appearances scheduled throughout the afternoon. Any views on monetary policy are likely to alter bets of a December rate hike, causing risks for the USD/GBP exchange rate.
EUR/USD – Euro Holds Opening Levels as Markets Vacillate on Deutsche Bank Troubles
The biggest source of market consternation for the Euro has been the legal proceedings against Deutsche Bank initiated by the US Department of Justice (DoJ). The DoJ has levied a $14 billion fine against Germany’s largest lender in response to allegations of mis-selling mortgage-backed securities in the approach to the financial crisis. The value of the fine is not much smaller than the bank’s market capitalisation and this has sparked fears that Deutsche Bank could collapse.
Not only could this trigger a domino effect in the German banking sector, but the contagion could spread throughout the Eurozone. Member states such as Italy, Portugal and Spain are already struggling with the precarious state of their own banks, so a shockwave throughout the sector could push financial institutions over the edge. There are even suggestions this could lead to the end of the Euro currency.
Headline German unemployment and inflation data tomorrow may momentarily distract investors from the woes of the country’s banking sector, helping EUR/USD advance if the data shows a 0.2% acceleration to the current 0.4% rate of inflationary growth.