British Pound Gains Traction on Brexit Optimism
What’s been happening?
Pound Sterling – UK Markets
The pound sterling rose to its strongest level against the euro in more than four months and recorded decisive gains vs the dollar on Tuesday on Brexit optimism. Although a lawmaker from the Northern Ireland’s Democratic Unionist Party (DUP) earlier in the day said that they were heading for a no-deal, BBC Political Editor Laura Kuenssberg later reported that ministers were told to be ready for another cabinet meeting toward the end of the week “because there might be enough movement by then to push button on a deal.” Additionally, Brexit Secretary Dominic Raab gave a ‘thumbs up’ to reporters while leaving the Cabinet meeting and provided an additional boost to the currency.
Meanwhile, the EU’s chief Brexit negotiator Michel Barnier told reporters that they were willing to consider improvements on the Irish backstop and reiterated that the solution wouldn’t have a time limit. Finally, commenting on the possibility of another cabinet meeting, “Any further cabinet meeting would be for purpose of having a discussion in advance of reaching a Brexit agreement,” British Prime Minister Theresa May’s spokesman said.
US Dollar – US Markets
The data released by the U.S. Bureau of Labor Statistics on Tuesday showed that the number of job openings edged down to 7.009 million in September from 7.293 million in August. A separate report showed that the IBC/TIPP’s Economic Optimism Index fell to 56.4 in November from 57.8 in October. “The IBD/TIPP Economic Optimism Index dipped from lofty levels at the start of November thanks to a lousy October for the Dow Jones and S&P 500 index, despite more good news about jobs and wage growth. Yet support for federal economic policies ticked up to a new 13-year high ahead of Tuesday's election, lifted by the highest approval the IBD/TIPP Poll has seen among Republicans,” the publication read.
As investors moved to the sidelines to wait for the midterm elections exit polls, the US Dollar Index ignored the data and stayed relatively quiet in the second half of the day. With first results showing some surprise wins by Democratic candidates in key House races, the greenback weakened against its rivals. As votes continued to be counted, the probability of Democrats winning control of the House retreated from the initial forecast of 90% to allow the dollar to start recovering its losses. However, the buck struggled to preserve its momentum as votes coming in from urban areas in the late evening put Democrats back in the spot to win the House.
Euro – European Markets
The IHS Markit announced that Services PMI in October (final) came in at its lowest level in more than three years at following September’s 54.1 reading. Assessing the report, “An export-led slowdown, linked to growing trade tensions and tariffs, has been exacerbated by rising political uncertainty, growing risk aversion and tightening financial conditions. The slowdown has consequently become more broad-based to increasingly envelop the services economy,” Chris Williamson, Chief Business Economist at IHS Markit said. On a similar note, Germany’s Composite PMI fell to its lowest level in five months at 53.4 while Services PMI slumped to a fresh 3-month low at 54.7.
Other data released by the Eurostat showed that the PPI in September rose 0.5% and 4.5% on a monthly and yearly basis, respectively, and both readings surpassed the experts’ estimates. Nevertheless, the shared currency stayed virtually unchanged against the dollar while suffering heavy losses vs the British pound.
What’s coming up?
UK: Halifax House Price from the UK will be published on Wednesday but markets are likely to stay focused on Brexit headlines.
US: The only data from the United States will be the Fed’s consumer credit change on Wednesday.
EU: The euro area retail sales and Germany’s industrial production data will be featured in the European economic docket.