Pound Falls on UK Economic Woes
Sterling recorded losses against the Euro and against the US Dollar, which hit a three-week low. According to a Bloomberg report, the European Union (EU) leaders agreed to start preparing for the crucial EU December Summit, in case negotiations between Britain and the EU don’t prove fruitful. A Michel Barnier adviser said that the two sides have to agree on a method that would allow the correct calculation of the final Brexit bill.
The European Central Bank (ECB) decided to cut down the quantitative easing (QE) programme to €30bn per month and to extend it by nine months. The move was considered more dovish than expected by the markets, leading to the Euro’s fall. In the US, the House of Representatives approved the budget resolution for the next fiscal year with a narrow margin. This is considered a victory for the Trump administration and increases the possibility of the the tax reform bill being approved.
Pound Sterling – UK Markets
Today, the Pound dipped against the US Dollar and hit a three-week low with the exchange rate set at $1.30. Sterling also fell against the Euro with the exchange rate set at €1.12. No significant economic data releases are expected from the UK with the attention of market experts already turned to next week’s Bank of England’s (BoE) monetary policy meeting.
An aide to the chief EU negotiator Michel Barnier said in London yesterday that the UK must sign up to a method for the calculation of what it owes to the EU. Stefaan De Rynck stressed that a method is needed “to be able to reassure the EU27 of the solidity of the UK’s guarantees.” De Rynck said that it’s important that disagreements on this subject “don’t bleed into future trade talks.” Barnier’s adviser finished his speech at the Institute for Government think tank conference by saying that “we need to take the drama out of that question in the UK, before it becomes a drama for the EU27.”
A survey by mortgage lender Halifax showed that public confidence in the outlook for British house prices hit a five-year low in October. According to the survey, confidence was hurt by pessimism about the UK economy, rather than the possibility of an interest rate hike by the BoE. Only 15% of those asked, saw a rate hike as an obstacle to buying a house. Halifax analysts said in their report that “house market optimism has declined significantly over the past year, with almost half of people expecting a general slowdown in the market.”
US Dollar – US Markets
The US Dollar jumped against the Euro with the exchange rate set at €0.86. The US Dollar Index moved upwards coming in at 94.87, which is a three-month top. The Dollar strengthened when the ECB appeared dovish regarding the reduction of its asset-purchasing programme and because of developments linked with the tax reform bill.
The House of Representatives approved a $4tn budget resolution for the next fiscal year yesterday. This is considered a major step toward the introduction of the tax reform bill. The measure passed with 216 votes in favour versus 212 votes against. The approval of the blueprint is considered a win for Donald Trump and the Republican party. Democrats commented that “the struggle Republicans had in passing the budget shows how many of them feel uncomfortable with eliminating the state and local deduction.”
In the afternoon, the US Bureau of Economic Analysis will publish the third quarter GDP figures and the Department of Commerce is going to release data regarding personal consumption expenditure prices for the July-September period. John Taylor, one of the key candidates for substituting Janet Yellen as the Fed’s Chair, said in a speech that the US economic growth is disappointing because of the monetary policy followed.
Euro – European Markets
The Euro edged lower against the US Dollar with the exchange rate set at $1.16. The Euro was sold off when the ECB announced that it will cut the QE size by half, but simultaneously extended the programme’s duration.
The ECB’s approach to the asset-purchasing programme was judged as dovish by the markets, leading to the Euro’s fall. ING analysts said in a report that the ECB “wants to start the exit as cautiously as possible, ideally without seeing the euro appreciate or bond yields increase. It is like stealing away from a party through the backyard, hoping no one notices that party hero is on its way out.”
The former ECB President Jean-Claude Trichet noted that Mario Draghi’s decision, regarding the QE, shows that the Eurozone’s economy is robust. An ECB survey of professional forecasters showed that inflation will rise to 1.9% by 2022, a bit higher than the 1.8% figure previously anticipated. The survey results showed that economic growth will reach 1.9% in 2018 and 1.7% in 2019. Both figures are improved since the last survey took place.
Other Currencies – Highlights
Sterling fell against the Australian Dollar, trading at 1.71 AUD. The Aussie fell when Malcolm Turnbull’s government lost its one-seat parliamentary majority. The reason was a ruling from the High Court that declared Deputy Prime Minister Barnaby Joyce was ineligible to remain in Parliament because he held dual citizenship when he was elected. Joyce has since then renounced his New Zealand citizenship, but the Court ordered that he should seek new mandate in New South Wales electorate.
The Pound dropped against the New Zealand Dollar, trading at 1.91 NZD. Data released by the Reserve Bank of New Zealand (RBNZ) showed that mortgage borrowing slumped in the pre-election period, similar to what happened before the 2014 parliamentary election. Figures showed that mortgage borrowing fell by $1.2bn when compared to the same time period in 2016.
Sterling dipped against the Swiss Franc, trading at 1.30 CHF. The Swiss government announced that it expects a budget surplus of $807m for 2017, instead of a deficit of $250m previously anticipated.