The Pound recovered some of the losses it suffered last week, even though the divisions in the government continue to cause significant political turmoil. According to a Sunday Times report, Theresa May will examine the possibility of reshuffling the cabinet, after the Brexit-focused European Council on 19-20th October. May will speak today in the House of Commons and is expected to warn that progress in negotiations with the European Union (EU) won’t be always smooth.

The Office for National Statistics (ONS) made a correction on employment inflation data, raising the unit labour cost in the second quarter of the year to 2.4% from the previous 1.6%, on a year-to-year basis. Economists said that the revision might force the Bank of England (BoE) to raise borrowing costs sooner than later. In the Eurozone, Yves Mersch, who is one of the European Central Bank’s (ECB) board members, said that the central bank has observed some disappointing developments of inflationary pressures and that the board is concerned about the number of non-performing loans (NPL) across the Eurozone.

Pound Sterling – UK Markets

Today, the Pound jumped against the US Dollar with the exchange rate set at $1.31. Sterling also performed well against the Euro with the exchange rate set at €1.12. The British currency clawed back some of the losses it suffered last week.

Due to the absence of important financial data released, the UK politics are once again in the spotlight. Theresa May will deliver a speech in the House of Commons later today, the first after her Florence one. The Prime Minister is expected to say that “the ball is in the EU’s court,” regarding the negotiations between the two sides. May will note that “the UK can prove the doomsayers wrong” and will add that, although she wants the best possible deal for the UK and the EU, progress in talks won’t always be smooth.

May got cornered last week by fellow Tory members who, according to media sources, plotted to move against her. The civil war in the Tory camp continued, during the weekend, with some members asking from May to remove Boris Johnson from the cabinet, while others urged her to sack Philip Hammond, accusing him of leading the Treasury’s “anti-Brexit doomsaying approach.”

US Dollar – US Markets

The US Dollar inched higher against the Euro with the exchange rate set at €0.85. The US Dollar Index (DXY), which measures the Dollar’s value against six major competitor currencies, also moved higher coming in at 93.81.

There will be no important economic data releases today since Americans will be enjoying the Columbus Day holiday. On Wednesday, market analysts will be waiting for the publishing of the Federal Open Market Committee (FOMC) minutes, which will unveil more details regarding the Federal Reserve’s plans on interest rates and the unwinding of its large balance sheet. On the issue of interest rates, James Bullard, the St. Lewis Fed President, said that he is increasingly concerned about the possibility of the Fed making a mistake, if it continues to raise rates without having solid proof that inflation is rising.

The tax reform is the key issue of the US economy with some market experts believing that Republicans will fail to deliver what they promised. A report published by Nomura said that analysts “remain pessimistic that serious reform will be passed and that Republicans will be able to raise enough revenue to permanently cover the costs of significantly lowering the corporate tax rate.” Their fears are based on the fact that Republicans have only slim majorities in both the US Congress and Senate, which makes it difficult to pass any bill without a near-unanimous approval.

Euro – European Markets

The Euro weakened against the US Dollar with the exchange rate set at $1.17. The Eurozone’s finance ministers are having a meeting today, during which they will discuss the future of the European Stability Mechanism (ESM). Klaus Regling, the ESM’s chief executive officer, has said in the past that the ESM could replace totally the International Monetary Fund (IMF) in any financial aid package in the future.

In Germany, the country’s statistics office released data regarding the industrial production in August. The production increased by 4.7% on a year-to-year basis. surpassing expectations of rising by 3.0%. On a month-to-month basis, the German industrial production increased by 2.6%, instead of 0.7%, as anticipated. An ING report said that strong data coming from Germany provides further evidence that the economy has returned to maximum speed after the summer holidays.

Yves Mersch, one of the ECB’s board members, delivered a speech in a Milanese university and said that the qualitative easing programme led to material improvement in credit conditions across the Eurozone. Mersch stressed that inflation forecasts are much harder to be made in a globalised world. “The economy is a profoundly complex setting. The ECB has shown great flexibility and ingenuity in dealing with the financial crisis,” Mersch added.

Other Currencies – Highlights

Sterling jumped against the Australian Dollar, trading at 1.69 AUD. The Aussie weakened when it was announced that China’s Caixin Services PMI in September came in far below expectations. The Australian and Chinese economies are closely linked and the slowdown in the growth of the services sector took its toll on the Aussie. In other news, JP Morgan forex strategy experts suggest that there is more risk that the Reserve Bank of Australia (RBA) will cut interest rates, rather than hike in the next months. They believe that rising prices and near-flat real wage growth would reduce the RBA’s confidence in raising borrowing costs.

The Pound surged against the New Zealand Dollar, trading at 1.85 NZD. Winston Peters, the leader of NZ First and “kingmaker” as the media calls him, will decide on Wednesday with which party he will form a coalition government. One of the key issues that Peters wants to address, being a government coalition member, is a Reserve Bank reform that would allow the Kiwi’s exchange rate to be used as a monetary policy tool. However, Peters refused to reveal details on the negotiations with Labour and National parties when he was asked if he wants to change New Zealand’s economic direction.

Sterling strengthened against the Japanese Yen, trading at ¥148.84. In an election debate over the weekend, Prime Minister Shinzo Abe said that he will remain in his place if his party retains the majority, in the upcoming snap elections on 22nd October.