Friday, 13th October
Yesterday’s session showed that markets had priced in a higher probability of a ‘no deal’ Brexit, as the fifth round of talks between the UK and EU concluded with the latter stating that discussions are at a ‘deadlock’. Traders’ fears of a ‘hard’ Brexit were quickly reassessed after the Pound was initially sold off; the GBP reversed its 1% fall on the day following reports that the EU’s chief negotiator Michel Barnier is willing to offer a two-year Brexit transition deal.
The lack of progress with Brexit is not new news for GBP markets, with contingency planning around a ‘no deal’ Brexit by UK officials logical. Brexit is not the only scenario priced into currency markets at the moment, as we expect the narrative for GBP to slowly shift towards the Nov ‘Super Thursday’ BoE meeting after next week’s EU leaders summit. Here we see upside risks as the Bank are not only likely to hike by 25bp, but the risks are that Governor Carney signals that this is more than a ‘withdrawal of stimulus’ hiking cycle.
Eurozone industrial production showed an excellent increase of 1.4%, which supported the Euro but was followed by ECB President Draghi who promised low Euro rates again. This saw the Euro slip back and disappointed Germany who of course have publicly stated that they would like higher Euro interest rates. The market is also coming to the conclusion that the Catalonian situation will not end up with independence for the region, either a resolution will come through the implementation of Article 155 or there will be a negotiated resolution, which will keep Catalonia in Spain. If the market is wrong about this we could see a large knee jerk reaction in the Euro.
PPI was as expected at 0.4% which helped to support the Greenback in US trading but the market has really been preparing for today’s important CPI number. We expect a headline figure of +0.6% and core CPI of +0.2%. Retail sales data is also released and we expect an increase of +1.6% MoM after last month’s 0.% fall. We also have the IMF meeting today and tomorrow for headlines.
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