The US Dollar Continues to Strengthen Against European Currencies
What’s been happening?
Pound Sterling – UK Markets
The British pound started the week under pressure as political jitters in the UK heightened concerns over the possibility of the Parliament not supporting Prime Minister Theresa May’s Brexit agreement. A former UK cabinet minister, Justine Greening, told reporters on Monday that the Brexit deal would not pass in the Parliament and argued that the UK should have a referendum with three choices i.e. current deal, leave on WTO rules, or stay in the EU. Meanwhile, “Good meeting with Michel Barnier this morning - crucial week for BREXIT - negotiating teams engaging intensively, more work still to be done. Solidarity across the EU remains very strong,” Ireland's foreign minister Simon Coveney tweeted out earlier in the day.
In an interview with CNBC, Bank of England (BoE) Deputy Governor Ben Broadbent reiterated that the outcome of Brexit could change the outlook for the UK economy materially. Regarding the policy outlook, “Limited and gradual rate guidance doesn't mean one rate hike per year precisely. Important thing is to ensure that we would not have to engage in a very steep series of rate hikes,” Broadbent said and added that the pound sterling would gather strength in the event of a good Brexit deal.
Although an article published in the Financial Times in the afternoon quoted Barnier saying that the main elements of the Brexit treat were ready to help the pound sterling stage a modest recovery, investors remained sceptical ahead of tomorrow’s Brexit discussion in the cabinet.
US Dollar – US Markets
With American traders enjoying the Veterans Day holiday, markets stayed relatively quiet in the second half of the day and the US Dollar Index, which advanced to its highest level in more than a year on Monday, didn’t have a difficult time clinging to its daily gains.
Meanwhile, in her prepared remarks delivered to a regional economic development group in Dallas Texas, the Federal Reserve Bank of San Francisco’s new president Mary Daly said that the U.S. economic expansion seems destined to become the longest on record. Touching on the monetary policy outlook, "I view this gradualism as a process of iterated learning, guided by incoming data That is, we take a policy action, wait, learn about the economy’s response, and repeat. The information gathered through this gradual approach is crucial for determining the speed and size of the subsequent policy adjustments," Daly stated.
Euro – European Markets
While speaking at the opening conference of 21st Euro Finance Week in Frankfurt, ECB Vice President Luis de Guindos explained that although the contagion from Italy was limited, it could possibly have a negative impact on the euro area economy. “Extending the macro-prudential framework to the asset management sector and developing policy tools to address emerging risks will be important. Italy is the main prominent case at the moment,” de Guindos stated.
With the deadline for Italy to resubmit its budget proposal approaching, Italy-German bond yield spread continued to rise on Monday and weighed on the euro. Citing a source familiar with talks, Reuters reported that Italy’s economy minister was planning to revise down the budget’s growth forecast for next year to convince the EU that Italy would not go above ta deficit of 2.4% of GDP in 2019. Moreover, Italy's deputy Prime Minister Luigi Di Maio argued that the only way to respect EU parameters was to make a “suicidal budget law” that would cause a recession.
What’s coming up?
UK: The UK’s Office for National Statistics will publish the labour market report on Tuesday. Analysts expect the claimant count to fall to 4.3K in October from 18.5K in September and see unemployment stay unchanged at 4%.
US: The U.S. economic docket will feature the NFIB’ Business Optimism Index and the Financial Management Service’s monthly budget statement.
EU: The Destatis will release the CPI figures from Germany on Tuesday and the ZEW will publish the euro area Economic Sentiment report.