What’s been happening?

Pound Sterling – UK Markets 

Monday’s Brexit headlines caused the optimistic expectations surrounding an orderly Brexit deal lose its effect on the markets, and the pound sterling failed to gather strength against its rivals. Government spokesman James Slack on Monday refrained from confirming that British Brexit Secretary Dominic Raab would travel to Brussels for a fresh round of talks this week. According to Bloomberg, “There is a difference between people talking optimistically about a deal and a deal being done,” Slack told reporters in London on Monday and added: “There can be no withdrawal deal without a precise future framework.”

Later in the day, The Tİmes reported that leading Conservative Brexiteers on Sunday told British Prime Minister Theresa May that they wanted the UK to be out of the EU customs arrangement before the next election in 2022. "Leading Conservative Brexiteers said that they were prepared to give Mrs May room for manoeuvre," The Times noted. "They warned, though, that any extension could run only until the next election in 2022. “After that, we can’t know who will be in charge so we must be fully out by then,” a senior Brexit supporter said."  

US Dollar – US Markets

Talking to reporters following his meeting with Chinese diplomat Wang, the U.S. Secretary of States, Mike Pompeo, pointed out that the U.S. had a fundamental disagreement and great concerns about China’s actions and added that the U.S. - China dialogues was something China “chose not to undertake.” Although these remarks forced the dollar to weaken against safe-haven assets, the US Dollar Index, which tracks the greenback against a basket of six major currencies, extended higher on Modany on the back of the buck’s strong performance vs the euro and the pound sterling. 

In the meantime, while speaking at a conference in Singapore, Federal Reserve Bank of St. Louis President James Bullard argued that the better-than-expected growth figures in the U.S. were likely to fade unless productivity picks up. “This is a possibility if U.S. investment improves and technological diffusion begins to improve business processes at a faster pace,” Bullard further explained. Touching on the monetary policy, Bullard stated that higher interest rates were no longer necessary.   

Euro – European Markets

Commenting on the tension between the EU and Italy, Italy’s Deputy Prime Minister Salvini said that an exit from the euro was not on their agenda but added that they wanted to change the EU rules. The market reaction to these remarks sent the yield on the Italian 10-year government bond to its highest level in nearly four years around 3.5% and weighed on the shared currency. Although Italy's EU Affairs minister Savona later in the day reassured markets that no one in the Italian government wanted to leave the EU, the shared currency suffered losses against the greenback and the Japanese yen on Monday. Savona further explained that a failure to reach an agreement with the EU could spark a broad financial crisis and that would be in nobody’s interest.

On monetary policy-related headlines, Klaas Knot, the hawkish Governor of the Dutch central bank, said that the Governing Council of the European Central Bank could start discussing the timing of an interest rate hike in January. Describing how the forward guidance of the ECB could change next year, Knot stated that the ECB could adopt a similar strategy to the Fed by announcing the number of possible rate hikes per year.  

The monthly report released by the Statistisches Bundesamt Deutschland on Monday showed that the industrial production in Germany contracted by 0.3% on a monthly basis in August following July’s 1.3% decline. With this data, the annual rate fell to -0.1% from 1.5% to match experts’ estimates. In the meantime, according to the Sentix GmbH, investor confidence weakened in October with the headline Confidence Index falling to 11.4 from 12 in September to miss the market expectation of 11.7.

What’s coming up? 

UK: The Bank of England’s Financial Policy Committee (FPC) will publish its statement on Tuesday. Later in the day, the BoE’s Deputy Governor Ben Broadbent will be delivering a speech.   

US: The NFIB will release its Business Optimism Index, and the IBD/TIPP will publish the Economic Optimism report. Chicago Fed President Charles Evans is scheduled to speak at a conference.   

EU: Trade balance data and current account report from Germany will be featured in the European economic docket on Tuesday.