Global Themes

Risk of further volatility looms; the week ahead
- Sterling primed for more swings?
- Dovish Fed comments weaken dollar
- EU to respond to Italy’s budget this week


Sterling primed for more swings?
Volatility was rife in the currency market last week as Brexit hogged the headlines. After securing a draft withdrawal agreement with the European Union (EU), Sterling trekked higher towards $1.32 against the US Dollar and €1.15 against the Euro. Then following multiple ministerial resignations, including former Brexit secretary Dominic Raab, Sterling sank over 1.5% against its major currency rivals, suffering its largest one-day drop in two years last Thursday. Sterling did find some solace on Friday though after leading Eurosceptic minister Michael Gove pledged his support for Prime Minister Theresa May. Ms May also appointed Stephen Barclay as her new Brexit secretary.

Although the threat of a leadership challenge is certainly unnerving market participants, Sir Graham Brady, the chair of the 1922 Committee of backbench MPs, said he has yet to receive the required 48 letters to call for a vote of no confidence in Ms May. Despite the escalating political turmoil in the UK, the 27 EU leaders are scheduled to meet on November 25th for a special summit to approve the draft Brexit deal. Ms May continues to campaign for this deal and is expected to visit Brussels once again hoping to lock down the deal. However, if the 48 letters do come in against Ms May, Sterling could significantly depreciate as UK political angst will dominate and increase the risk of a disorderly Brexit.

The UK’s latest Inflation Report will be released this Thursday, but until then the pound remains at the mercy of Brexit-related news this week and it is probable that more rocky days lie ahead.


Dovish Fed comments weaken dollar
The US Dollar is wrestling with the $1.14 handle against the Euro this morning. The US Currency reached a multi-month high against a basket of currencies early last week before suffering a string of daily declines towards the end. Conflicting news on US-China trade war developments gave rise to some erratic price action across financial markets and any further updates this week will likely drive market sentiment. The latest headlines come from the Asia-Pacific Economic Cooperation (Apec) summit held over the weekend, which revealed the two largest nations are still very much engaged in a trade war. US Vice-President Mike Pence warned he was prepared to more than double the tariffs imposed on Chinese goods.

The US Dollar suffered another blow late on Friday to round up what was its worst weekly performance against a basket of currencies since mid-September. The newly appointed Vice Chair of the Federal Reserve (Fed), Richard Clarida, stated that US interest rates are nearing Fed estimates of a neutral rate and slowing global growth is a concern. Fed member Patrick Harker also made dovish remarks, indicating that economic data over the next few weeks will help determine whether a rate hike in December is prudent (source: WSJ). According to CME Group’s FedWatch Tool, the probability of a US rate hike in December has dropped from 75% to 65% in just over a week.

This week, an array of economic data is due out from the US. US housing starts numbers are revealed on Tuesday, durable goods and existing home sales on Wednesday and market PMIs will wrap up the week’s data calendar on Friday. The comments from several Fed members last week suggest this data from across the pond will be more heavily scrutinised than usual


EU to respond to Italy budget this week
The Eurozone’s economic data calendar is relatively quiet this week, leaving the Euro’s trading direction subject to developments on Brexit and Italy’s budget plan. Towards the end of the week, consumer confidence data from the bloc will be released on Thursday and Markit PMI figures, both composite and services, will be revealed on Friday. Slowing economic growth in the Eurozone and dwindling confidence indicators have raised doubts about whether the European Central Bank (ECB) will hike interest rates at all next year. This doubt has weighed on the strength of the common currency as it remains anchored at the lower end of its 2018 trading range of circa $1.25-$1.12 against the US Dollar.

Last week, Italy’s populist government maintained its 2019 goals of 2.4% budget deficit and 1.5% growth, despite demands from the European Commission to change its 2019 budget plan. The commission is expected to state that Italy is breaking EU fiscal rules, when it issues its responses to euro-area draft budgets this Wednesday, which could weaken the Euro as investor anxiety intensifies.

The ECB’s minutes of its October monetary policy meeting will also be unveiled this Thursday. This could be another key trading point for the Euro as traders continue to assess the probability and timing of the ECB’s policy tightening schedule.

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