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Currency Market Analysis

Oct 17, 2019 | Currency Market Analysis

Global Themes

EU summit waiting on Brexit deal

Brexit in bullets
- 2-day EU summit starts today
- Negotiations continue this morning
- Most issues ironed out, incl. Irish border
- DUP still unsupportive = Sterling’s sharp drop this morning
- Most ERG members to approve deal?
- Will the expelled Tory MPs back the deal?
- Government table motion for special Saturday sitting
- Opposition to try and attach confirmatory referendum to any deal?
- If deal not approved, PM to request extension
- GBP/USD has travelled nearly 700 pips in a week

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Brexit

Huge day in Brussels awaits
This time last week, GBP/USD opened the day at $1.2204. This morning, the opening rate was $1.2830. The British Pound’s recent rally continued to fresh 5-month highs yesterday, brushing $1.2875 against the US Dollar and challenging the mid-€1.16 region versus the Euro. Though the 2-day EU summit starts today, UK and EU negotiators are expected to continue talks. The big question is whether a deal can be struck in time for sign-off before the summit ends?

There is certainly an optimistic feel in the market about a deal being reached. The volatile pound has been slipping and spiking erratically but lower moves have typically been short-lived, and corrections higher have followed. As a result, higher highs and higher lows are forming a notably uptrend. It seems the UK and EU negotiators have resolved their differences on several issues relating to the Irish border, but the Democratic Unionist Party (DUP) continue to hold out against backing the deal. If the new deal doesn’t get signed off at this summit, there are rumours of an emergency summit before the end of the month. Meanwhile, the UK government will table a motion to for Parliament to sit this Saturday (first weekend sitting since 1982). MPs could be asked to vote on the Brexit deal but if it is voted down by MPs, PM Boris Johnson would have to request a Brexit extension. MPs could also use Saturday to vote on attaching a confirmatory referendum to whatever deal is struck.

There is scope for GBP/USD to climb towards $1.30 if the DUP confirm their support for the deal. GBP/EUR could also extend towards €1.17-1.18. However, with the big hurdle of winning Commons approval still lingering and a general election looming, the pound is still at risk of retreating. 

UK retail sales

UK retail sales today
At 9:30am this morning, UK retail sales data for September will be released. Consensus forecasts are to see retail sales rise 3.2% from 2.7% y/y. The month on month figure is forecast flat at 0%, though better than the previous print of -0.2%.

Weak UK labour market data this week was largely ignored. UK inflation held steady at 1.7% y/y but cooled 0.1% compared to 0.4% m/m. Again, sterling barely budged. Although these are big data pieces for the UK, the pound is being driven primarily on Brexit news. Inflation across the UK is rising at its slowest pace in almost three years and below the Bank of England’s (BOE) 2% target. This helps boost household’s disposable income, especially given the rise in average earnings. However, it also eases pressure off the BOE from hiking interest rates in the future, even in a smooth Brexit scenario.

Currently, money markets are pricing in rate cuts by the BOE next year. However, several policymakers have signalled rate cuts or hikes could follow a no-deal Brexit given inflation is likely to stretch beyond the central bank’s target as a result of an aggressive depreciation in GBP.

USD

Gloomy data sends dollar lower
The US Dollar weakened across the board yesterday following poor US retail sales data. In September, US retail sales fell for the first time in seven months, painting a gloomy picture of the US economy and increasing bets of further interest rate cuts by the US Federal Reserve (Fed).

The US Dollar index, which tracks the dollar against a basket of currencies, fell to a 1-month low, in turn allowing EUR/USD to test fresh 1-month highs near $1.11. Household consumption has been a dominant factor behind economic growth in the US, but amidst the ongoing trade war and economic and political uncertainty, it appears the consumer side is showing signs of weakness too. This could trigger more rate cuts by the Fed to help safeguard the US economy in the future.

Fed policymakers meet at the end of the month, and money markets are currently pricing in an 88% probability of a 25-basis point cut (source: CMEGroup). US industrial production is on the radar at 2:45pm.


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