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Interest Rate Comments And Brexit Tension Drive Sterling Price Action

Last week economic data was quiet for the UK with the market largely discounting the positive employment data, due to furlough conditions in the reading. Next month’s reading could be interesting due to the furlough ending at the end of September. In the meantime, the monthly GDP shows the economy returned to growth but at a slower rate than expected. This has highlighted that the economy has lost momentum in the last few months.

However, driving price action has been interest rate expectations and ongoing trade tension with the EU. The probability to raise interest shifted from sub 10% to circa 70% rate in the last month but Sterling failed to make any gains on the back of this due to ongoing concerns surround stagflation. Bank of England’s (BoE) Monetary Policy Committee (MPC) members provided a slightly cautious tone.

Later in the week, Sterling got a lift as comments from the central bankers were slightly dovish and Brexit talks made a breakthrough. BoE member Tenreyro stated that inflation should be temporary, and she also warned that an interest rate increase to combat one-off price increases would be self-defeating. In the meantime, Mann also stated that the central bank can hold off raising rates due to the increase in market rates. What this does highlight is that there is a split in the opinions of the MPC and as a result, rhetoric from members will be closely monitored for further clues.

Later in the week, The EU made the first move in reconciling the difference between the two blocks. Their proposal aims to vastly reduce the customs controls of goods entering Northern Ireland from the UK whilst reducing the current paperwork needed. In addition, the EU has proposed a reduction in the checks required to export meat and plants by approximately 80%, to avoid another sausage wars.

Looking to the week ahead there are three main focuses. On Tuesday, BoE Gov Bailey is due to deliver welcoming remarks at an online conference on climate change. Given the current backdrop surrounding a potential interest rate hike, the market will decipher his rhetoric for clues on future policy. The headline inflation is due for release on Wednesday which is expected to remain elevated at 3.2%; any move higher could put further pressure on the Bank of England to act. On Friday, retail sales are due for release, given the concern for the drop momentum in consumer spending the market will focus on this number.

US Inflation Maintains Pressure on FOMC

The market continues to try and articulate whether the economy is in the position where the Federal Open Market Committee (FOMC) deem fit for the tapering of QE; especially after the second big miss in non-farm payrolls earlier in the month. Inflation continues to put pressure on the FOMC maintaining its upward trajectory. The US Consumer Price Index (CPI) rose by 0.4% in September as rising food and energy prices pushed the price index to around its highest annual increase in 13-years. On an annualised basis prices have risen by 5.4%. Fed chair Powell commented that inflationary pressures are expected to subside over time, although acknowledging that global supply chain bottlenecks threaten broader inflation. The minutes from the FOMC’s September meeting revealed the Federal Reserve are on track to begin tapering in November or December. Member of the committee commented that if a decision to begin tapering occurred at the next meeting.

Looking to the week ahead, it is relatively quiet. Highlights include industrial production on Monday, housing starts on Tuesday and the PMIs on Friday. The Fed Beige Book survey on Wednesday may warrant greater attention as it provides a summary of economic conditions based on anecdotal information. There will also be focus on several Fed speakers in the week ahead of the quiet period before the 2/3 November FOMC meeting. The market will focus on any comments that suggest the chosen path for tapering in November’s meeting.

Interest Rate Differentials Keep The European Single Currency Under Pressure

The single currency continued to remain under pressure post a fresh 15-month against the US Dollar due to ongoing Brexit tension, supply chain problems and interest rate differentials. The currency settled following the release of their new four-pronged plan to reform the Northern Ireland protocol yesterday during a press conference with Maros Sefcovic. The plan includes four key pillars: customs, sanitary and phytosanitary requirements, medicines, and democratic oversight. The UK and EU are due to start a period of extensive talks with further news flow expected as developments unfold. In the meantime, European Central Bank policymaker and Dutch Central Bank Chief Klass Knot commented on Eurozone inflation. Knot mentioned that expectations could be exceeded in the short and medium term, arguing that this outlook provides a strong case for the ECB to end its emergency bond purchasing programme next March.

In terms of economic data, much of the focus will remain on economic activity to articulate the impact of the ongoing supply chain bottlenecks. On Friday the first reading of the PMI manufacturing and service sector data is due for release which is expected to slow but remain in expansionary territory. In addition, Brexit development will continue to remain front and centre of newswire and overall sentiment.

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