What’s been happening?

Pound Sterling – UK Markets 

The pound sterling recorded its biggest daily percentage gain against both the euro and the dollar in more than a year on Thursday on the back of the Bank of England’s optimistic approach to Brexit negotiations and hawkish policy stance.

As expected, the BoE’s Monetary Policy Committee (MPC) voted unanimously to keep its policy rate unchanged at 0.75% and hold the asset purchase facility steady at £435 billion. “The economic outlook will depend significantly on the nature of EU withdrawal, in particular, the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets,” the BoE noted in its monetary policy statement.

Speaking to reporters in a press conference, Governor Carney repeatedly said that the likely scenario was for the UK to reach an orderly Brexit deal but they were making preparations for a no-deal scenario. Regarding the policy reaction, Carney explained that it was not yet possible to forecast if rates would need to rise or fall in response. “Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” Carney stated. The Governor also pointed out that a Brexit deal based on Chequers would allow them to raise their growth and inflation forecasts.  

On Brexit-related headlines, citing several diplomats familiar with the plan, the Financial Times claimed that the EU’s Brexit negotiators were exploring a compromise on a plan for Northern Ireland that would give the UK stronger guarantees that a customs border would not be needed along the Irish Sea. 

US Dollar – US Markets

The IHS Markit on Thursday reported the business activity in the manufacturing sector continued to expand at a healthy pace with the PMI ticking up to 55.7 in October from 55.6 in September. "The manufacturing sector saw a strong start to the closing quarter of 2018, with new order inflows rising sharply and business optimism spiking higher in an encouraging sign that firms expect the good times to continue into 2019,” Chris Williamson, Chief Business Economist at IHS Markit said. However, the details of the report revealed that Trump administration’s trade policy drove up input prices in October and remained as the main downside risk on the outlook. Similarly, the ISM’s manufacturing survey highlighted several comments from respondents that revealed the negative impact of tariffs. “Mounting pressure due to pending tariffs. Bracing for delays in material from China — a rush of orders trying to race tariff implementation is flooding shipping and customs,” one of the comments read. 

Following its rally to a fresh 2018 high on Wednesday, the US Dollar Index staged a deep correction on Thursday and erased all of the gains that it recorded this week. Meanwhile, the U.S. Bureau of Labor Statistics announced that the labour productivity in the nonfarm business sectors increased 2.2% in the third quarter with unit labour costs rising 1.2% in the same period to come in line with expectations.     

Euro – European Markets

The shared currency retraced its losses against the dollar on Thursday but fell to its lowest level vs the British pound in more than two weeks. There were no macroeconomic data releases from the euro area on the day and investors remained focused on the BoE event. 

In the meantime, Italian Prime Minister (PM) Giuseppe Conte told reporters that the positive effects of reforms would be seen in 2019 and it was unfair to blame the government for the weak macroeconomic figures. Conte further added that the budget talks with the EU were not over concessions.

What’s coming up? 

UK: The IHS Markit’s Construction PMI will be the only data featured in the UK economic docket on Friday.

US: The U.S. Bureau of Labor Statistics will publish its employment report. Following Septembers 134K increase, the nonfarm employment is expected to rise by 190K in October and the unemployment is seen staying unchanged at 3.7%. Markets will also be paying a close attention to the wage inflation data.     

EU: The IHS Markit will publish the Manufacturing PMI data for the euro area and Germany on Friday. re won’t be any macroeconomic data releases from the euro area.