Sterling in the spotlight ahead of High Court ruling and BOE

Last nights Fed meeting turned out to be a bit of a sideshow to the fluctuation in US opinion polls which are currently driving the direction of global markets, with US markets closing lower for the seventh day in succession, as the US election date starts to move into view.

Last nights Fed meeting turned out to be a bit of a sideshow to the fluctuation in US opinion polls which are currently driving the direction of global markets, with US markets closing lower for the seventh day in succession, as the US election date starts to move into view.

The Fed made no mention of the political tsunami affecting global markets merely stating that the US economy is making good progress, and unlike last year they held back from directly implying that a rate hike was imminent, though the removal of the line about inflation remaining low in the near term would appear to suggest that policymakers expect prices to start rising again, thus keeping the prospect of a December move very much on the table.

Even though Boston Fed President Rosengren dropped his dissent from September, meaning an 8-2 majority for staying on hold from a 7-3 one, nothing can be inferred from that given his recent comments that he was prepared to wait until after the election to move on a rate rise.

While a December rate rise still seems the most likely outcome and the probability of a move in December has gone up to 78% overnight, we can’t rule out the prospect of a delay if the US economy undergoes a Trumpectomy in just under a weeks’ time. 

Gold has pushed back above $1,300 an ounce and further declines in the US dollar and stock markets has seen investors adopt a much more cautious approach to the tail risks of an unexpected result. It would appear that the “muscle memory” of the unexpected “Brexit” result is still fresh in the markets psyche, and looks likely to continue to weigh on European markets when they open later this morning.

With oil prices also sliding on the back of the biggest weekly build in memory at 14.4m barrels, it would appear that the failure of OPEC to come to a consensus on a production freeze isn’t helping sentiment either.

Despite some of the most bearish estimates the UK economy continues to confound expectations with its performance since the “Brexit” vote in June.

While the attention in the early part of the week was on the future of the Bank of England governor Mark Carney, which now appears to be resolved, the headline numbers on the economic data have continued to hold up well, despite some of the more dire predictions.

Both construction and manufacturing PMI numbers showed decent expansion in October along with decent internals, though it is clear that pricing pressures are starting to build, which a lower pound will only exacerbate.

A spate of recent headlines have focussed on some of the large price rises announced by Microsoft and Apple, as well as the Marmitegate affair, however this week’s BRC shop price data continues to show that prices are still declining year on year.

Today’s services PMI for October is expected to confirm that Q4 has got off to a decent start with a modest decline from the September number to 52.5 from 52.6.

A positive number here, combined with last week’s better than expected Q3 GDP number of 0.5% will keep the Bank of England on the sidelines at today’s monetary policy rate decision, and quarterly inflation report, with the hope that policymakers will dial down the “dovishness” that has been a recurring theme in recent policy pronouncements.

It is quite clear that any further easing at this time is not necessary and it is quite likely that the Bank of England will have to revise upwards its inflation and growth forecasts. The inflation forecast will be of particular interest given the recent rise in forward inflation expectations which are currently well above the levels of 10 year gilt yields.

Something else that could move the pound is the announcement of the High Court ruling at 10:00GMT on whether Prime Minister Theresa May can trigger Article 50 without a parliamentary vote. If the High Court rules in the governments favour then MP’s will lose the power to influence or prevent the unilateral triggering of the process, which could see the pound come under pressure again after finding some support in the last couple of days.

That being said whichever side loses is likely to appeal the verdict, so the process is unlikely to be final.

EURUSD – having seen the euro continue to pull higher, the 1.0950 level, now becomes a major support with the prospect of a move back towards 1.1140 area where a number of important moving averages converge.

GBPUSD – the pound has continued to make progress above 1.2100 pushing through 1.2300 and potentially opening up a move towards 1.2430. The main support still remains down at the recent lows around 1.2100. A break below the 1.2000 area has the potential to open up the previous flash crash lows at 1.1950, and possibly lower.

EURGBP –still finding resistance near the range highs near 0.9050, with support at the 0.8950 level, though we do have resistance also at the 0.9080 area. If we push below the 0.8950 area we could well slip towards the 0.8870 area.

USDJPY – the failure to push above the 105.50 area, continues to weigh on the US dollar and we look to be heading back towards the 102.80 area. We need to get back through 104.30 to argue a return to the 105.00 area.

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