Pound Sterling Rebounds Ahead of the UK Data Dump
What’s been happening?
Pound Sterling – UK Markets
The pound sterling rose to its highest level in nearly four months against the euro on Tuesday and continued to strengthen vs the dollar as latest Brexit headlines suggested that a Brexit deal could be around the corner. Earlier in the day, British Prime Minister Theresa May’s Spokesman, James Slack, said that PM May was trying to find Brexit arrangements that work for everyone and added that the new proposal on Northern Ireland backstop would be brought forward in ‘due course.’ Additionally, citing EU diplomats familiar with talks, Dow Jones Newswires claimed that divorce terms could be settled by Monday.
Although Brexit Secretary Raab adopted a more cautious tone during his speech at the Parliament later in the day, the pound sterling didn’t have a hard time preserving its daily gains. Raab stated that they were expediting preparations for a no-deal and reiterated that they would not accept anything that threatens the constitutional integrity of the UK. “We are aiming for October council, but there is a leeway to slip into November,” Raab further added.
Meanwhile, while testifying to the Economic Affairs Committee, Bank of England Deputy Governor Ben Broadbent didn’t touch on the monetary policy and noted that the Consumer Price Index (CPI) was superior to the Retail Price Index (RPI) as a measure of inflation.
US Dollar – US Markets
The monthly report published by the NFIB Research Foundation on Tuesday revealed that the Business Optimism Index edged down to 107.9 in September from 108.8 in August and fell short of the market expectation of 108.9. Later in the day, “Americans felt better about their personal finances at the start of October than at any time in the 18-plus years of the IBD/TIPP Poll,” Investor’s Business Daily announced as the Economic Optimism Index improved to 57.8 in October to beat analysts’ estimate of 54.6. These mixed sentiment data failed to provide a directional clue to the dollar, and the US Dollar Index closed the day modestly lower near 95.70.
Commenting on the near-term monetary policy outlook, Dallas Fed President Robert Kaplan said that he was in favour of rising rates three more times until June 2019 and explained that inflationary pressures were building due to tariffs, higher oil prices, and the hot labour market. Kaplan also argued that the increase in the 10-year T-bond yield could create uncertainty over future growth prospects.
In the meantime, President Donald Trump spoke to reporters before leaving for an event in Iowa, and, once again, sounded displeased with the Fed’s tightening strategy. “Well, I like to see low interest rates. The Fed is doing what it thinks is necessary but I don't like what they're doing because we have inflation really checked, and we have a lot of good things happening,” Trump stated. "I just don't think it's necessary to go as fast."
Euro – European Markets
According to the Statistisches Bundesamt Deutschland, imports declined 2.7% on a monthly basis in August compared to a 0.1% fall in exports to lift the trade surplus of Germany to €13.8 billion from €15.9 billion. Other data showed that Germany’s current account surplus stayed unchanged at €15.3 billion in the same period. Nevertheless, the shared currency failed to make a meaningful recovery amid the ongoing uncertainty surrounding Italy budget talks.
"Serious investors will return to Italy when they have understood budget increases jobs and lowers taxes," Italy’s Deputy PM Matteo Salvini said on Tuesday and reiterated that the government had no intention of backtracking on its budget target. On the other hand, while addressing the Parliament, Italy's finance minister Giovanni Tria discussed the potential negative impact of declining global trade on Italy’s economic growth and said that the structural deficit would recover once the GDP growth figures and the unemployment rate returned to pre-crisis levels.
What’s coming up?
UK: Wednesday’s busy economic docket in the UK will feature industrial production, manufacturing production, trade balance and August GDP growth figures. Furthermore, the National Institute of Economic and Social Research will publish its monthly GDP estimate.
US: The U.S. Bureau of Labor Statistics will release the PPI report, which is expected to remain steady at 2.8% on a yearly basis in August. Chicago Fed President Charles Evans is scheduled to deliver a speech on Wednesday as well.
EU: The European Central Bank will have a non-monetary policy meeting. Industrial output data from Italy will be watched closely.