Having spent a good part of yesterday in positive territory, European markets slid back sharply in the last half hour of trading to finish the day lower.
Trading was fairly subdued however, ahead of the start of the latest Chinese Communist Party Congress, where we could get some clues as the type of policies likely to be pursued over the next five years of President Xie’s tenure as head of the Chinese government.
It was also a mixed session for US markets, with the Dow making a new record high above 23,000, before slipping back, though the NASDAQ and Russell 2000 both finished the day lower.
The pound came under pressure yesterday despite the latest CPI inflation numbers rising to a five-year high of 3% in September. The rise in inflation continues to support the narrative that the central bank will in all probability look to raise interest rates before the end of the year. In fact the testimony of Governor Carney did nothing to change market perceptions of such a move, though while he didn’t confirm the prospect of a November rate increase due to higher inflation, he did say that he anticipates having to write a letter to the chancellor next month explaining why CPI was more than 1% above target at over 3%.
What helped undermine the pound was a rather downbeat outlook from the OECD about the UK economy as well as some rather dovish musings on monetary policy from new MPC members Silvana Tenreyro and deputy governor David Ramsden, who both suggested that they were in no rush to raise interest rates at the next meeting in November. This dovishness from two new members of the committee has shifted the maths on the MPC enough to suggest that even if the bank were to move next month the move is unlikely to be unanimous.
A lack of unanimity wouldn’t be too surprising given the number of voices already arguing against such a move, however a lot of these voices are the same voices who were arguing that the bank should cut rates just over a year ago, an occasion where it can be argued that the bank erred in its hastiness to alter policy, and which has undoubtedly contributed to the current mess the bank finds itself in, with respect to high inflation.
In any case the markets have already priced the rate hike in and it would probably take a significant disappointment in today’s wages and unemployment data to alter that calculation. Today’s ILO unemployment data for August is expected to come in unchanged at 4.3%, a 42-year low, while the latest average earnings data is expected to remain constant at 2.1%.
The strength of the US dollar was also a partial factor behind the pound's weakness yesterday as speculation starts to increase as to who might get the job of the new Fed chair, with John Taylor the latest candidate to be touted as a replacement for incumbent Janet Yellen. The Stanford economist is broadly viewed as a policy hawk which would make him a strange choice for President Trump, given that most would surmise that the President would prefer someone who tends to lean to the dovish side, given his preference for a weaker US dollar. This would suggest that current board member Jerome Powell is in pole position assuming that Janet Yellen can’t be persuaded to stay on.
EUR/USD – continues to drift lower with the prospect of a retest of the 1.1670 lows earlier this month. We need to overcome the 1.1830 area to argue for a return to the 1.1920 area.
GBP/USD – the pound has continued to drift lower with interim support currently at the 1.3120 level as well as the lows this month at the 1.3020 area. We need a move back the 1.3340 area to retarget the 1.3420 area.
EUR/GBP – still overall bearish towards the 0.8820 level while below the 0.8940 area after last week’s bearish key day reversal. A move back through 0.8940 retargets the 50 day MA at 0.9020/30 area.
USD/JPY – has found some support at the 111.60 level but we need to push back through the 112.50 area to retarget the highs from last week at the 113.40 area. The risk remains for a move towards the 110.80 area in the short term, with interim support at the 111.30 level.
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