Sterling
Sterling grew in strength against most of the majors yesterday as UK construction data impressed, Prime Minister Theresa May said that she would campaign for a good EU deal for the agriculture sector and London’s High Court said it would deliver a verdict on whether UK parliament will have the chance to vote on ‘Brexit’ at some point today.
Markit reported yesterday that British construction output rose from 52.3 to a seven-month high of 52.6 in October but the majority of the Pound’s gains were linked to hopes of a High Court ruling on ‘Brexit’. Later today we will find out whether the ruling Conservative party has the power to trigger Article 50 on its own, or whether parliament will have the chance to vote on the decision. The news gave hope that ‘Brexit’ may be reversed, but even if the exit process needs ratification there is still a strong chance that invoking Article 50 could pass a commons vote due to the referendum result.
It is entirely likely that Sterling could rally in a knee-jerk reaction to the High Court ruling if it shows that parliament will get a say, however, the long term implications of the verdict mean that the Pound will struggle to hold onto any relief rally gains. If the High Court rules that parliamentary ratification is not needed then GBP is liable to depreciate.
Euro
The Pound to Euro exchange rate traded flatly yesterday as optimism surrounding London’s High Court ‘Brexit’ ruling failed to make a lasting impact on GBP/EUR.
The single currency was boosted by a surprise downtick in German unemployment, from 6.1% to 6.0%, while some UK investors were perturbed by a statement from Moody’s suggesting anything other than a trade deal retaining access to the EU single market would lead to a further credit rating downgrade to the UK. Moody’s currently rates Britain as Aa1, the second-highest rating.
Later today Markit is due to release October’s UK service sector PMI report, which is tipped to see output decelerate minimally from 52.6 to 52.5. Anything above the consensus could prop-up demand for the Pound while anything lower could hurt Sterling.
The Bank of England is set to announce its monetary policy decision at midday, but there is a small chance of further stimulus, which would likely weigh on the Pound. Markets will be interested in the rhetoric employed by BoE Governor Mark Carney as this could give clues as to the future direction of policy.
US Dollar
Fears that the political status quo could be shaken up by a Republican Donald Trump victory marred the US Dollar yesterday.
‘Cable’ rallied to a three-week high as jittery investors pulled out of equities and perceived riskier assets in a sign that traders are now taking Trump’s Presidential campaign seriously. Up until a week ago, speculators were fairly confident that market-friendly Democratic candidate Hillary Clinton would claim victory but the latest FBI email probe has dented her campaign and prompted traders to hedge their bets.
During the evening the Federal Reserve left rates on hold at 0.25% but mildly hawkish rhetoric paved the way for an expected rate hike in December. Indeed, markets are pricing a 67% chance of a rate rise before the end of the year, and as such the market reaction to the Fed announcement was fairly muted.
Canadian Dollar
The Pound also reached a three-week high against the Canadian Dollar yesterday as North American trade prospects softened on the fear of a Trump victory. The risk-sensitive ‘Loonie’, which declined -80 pips versus Sterling, was also hurt by a -3.4% plunge in crude prices. Oil tumbled following a hugely higher-than-anticipated uptick in US crude stockpiles. The 14.4 million barrel increase smashed forecasts of 1.6 million and was the worst weekly figure in the index’s 34-year history.
Australian Dollar
Sterling rallied by around half a cent against the Australian Dollar yesterday as slim hopes of a ‘Brexit’ turnaround bolstered the Pound and Trump victory anxieties paralysed risk assets.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate plummeted two cents to its weakest level since the flash crash at the start of October. Barring the temporary plunge on October 7, GBP/NZD is currently trading at its lowest level on record. The ‘Kiwi’ was given a massive boost this week by a surprise slide in domestic unemployment from 5.1% to 4.9%, which led to a softening of Reserve Bank of New Zealand rate cut bets. However, there is still a relatively significant chance of the RBNZ slashing rates at its meeting next week.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (OCT) Medium 52.5
10:00 EUR Euro-Zone Unemployment Rate (SEP) Medium 10.0%
12:00 GBP Bank of England Rate Decision (NOV 3) High 0.25%
12:00 GBP BOE Asset Purchase Target (NOV) High 435b
12:00 GBP Bank of England Inflation Report High
14:00 USD ISM Non-Manufacutring Composite (OCT) High 56