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Sterling soars over Brexit hopes, BoE in focus

European stock markets enjoyed a bounce yesterday as global sentiment was less fearful. 

By-and-large, October was a painful month for stock markets around the world but bargain hunters stepped in yesterday, and European markets ended the day on a positive note. The macro and geopolitical outlook didn’t change, but the mood appeared to have lightened, and buyers entered the fold. Shares were relatively cheap, so a lack of negative news might have encouraged dealers to go long, but given the environment is still uncertain, the positive mood might not last long. Sentiment on Wall Street was one of cautious optimism too as tech stocks gained the most ground, but given how far we have fallen, a bounce back is hardly a surprise.

Overnight, the Caixin survey of Chinese manufacturing was released, and the reading came in at 50.1, and economists were predicting 49.9.  The official manufacturing PMI report yesterday was an underwhelming reading too. Larry Kudlow, President Trump’s economic advisor, announced that nothing is ‘set in stone’ regarding Chinese tariffs, and the suggestion was the US may not be as aggressive with China as initially thought. Shares in China are firmly higher today.

Sterling made ground yesterday after Dominic Raab, the Brexit Secretary, claimed he is confident an agreement will be reached by 21 November. We have heard this sort of talk before, but hopes were raised on the back of the announcement. There was a little backtracking, and now a ministry spokesperson is claiming no end date has been set. It was reported that the UK and EU negotiators have struck a tentative deal over financial services.

The pound enjoyed a boost from the Philip Hammond’s budget too. Traders started to feel that the looser fiscal policy could help the economy, and in turn prompt the Bank of England (BoE) to hike interest rates sooner than initially expected.

The BoE interest rate decision and inflation report will be announced at 12pm (UK time). No change is expected to the monetary policy. The bank’s chief, Mark Carney, will issue a statement at 12:30pm (UK time). Since sterling has lost some ground in recent months, there is the risk of higher inflation from imports, and traders will be listening out for a possible upward revision to the inflation forecast. Should the CPI forecast it might push sterling higher.   

The eurozone revealed some solid economic updates. The inflation rate for the currency bloc rose to 2.2%, meeting forecasts. The core CPI reading jumped from 1.1% in September to 1.3% in October, and this is encouraging to see as it shows that actual demand is rising. The unemployment rate is held steady at 8.1%.

The latest services and manufacturing reports from the region point to an economic cooling, so a higher cost of living will add to the region’s worries. The row between Italy and the EU over the budget deficit is still ongoing and is likely to weigh on the region

The US ADP employment report showed that 227,000 jobs were added in October, but the September report was revised down to 218,000 from 230,000. At 12.30 pm (UK time), the latest jobless claims will be released, and the consensus estimate is 213,000.

There are also a number of manufacturing PMI reports due out today, the UK, Canada and the US, as well as the ISM manufacturing PMI report from the US.

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1300 area to be retested. A move to the upside could run into resistance at 1.1593 – the 100-day moving average.

GBP/USD – the push higher since mid-August is starting to look weak, and if it remains below 1.3000, it could put 1.2661 on the radar. A rally above 1.3000, could bring the 1.3250 region into play. 

EUR/GBP – has been pushing lower since August, and if it holds below the 200-day moving average at 0.8837, its outlook might remain negative. A break below 0.8800 might bring 0.8725 into play. A rally might encounter resistance at 0.9000.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 111.37. 

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