The Pound strengthened against both the US Dollar and the Euro on news that Michel Barnier, the chief EU Brexit negotiator, might offer Britain a two-year transitional period deal in order to stay in the European Union (EU) market. Jean-Claude Juncker, the president of the European Commission (EC), watered down expectations when he commented that the UK will have to pay the bill if it wants to proceed to the second round of talks, but this didn’t stop Sterling from climbing.

In Europe, Bloomberg’s sources said that the European Central Bank (ECB) board is discussing starting the reduction of its asset purchasing programme from January 2018. In the US, data regarding inflation and retail sales are due to be released later today.

Pound Sterling – UK Markets

Today, the Pound jumped against the US Dollar with the exchange rate set very close to the $1.33 mark. Sterling also surged against the Euro with the exchange rate set at €1.12. The British currency strengthened on the back of a news report saying that the chief EU negotiator might offer the UK a two-year transition period to stay in the EU market.

The Pound had fallen yesterday, after Michel Barnier said in the press conference, marking the end of the fifth round of negotiations, that Britain and the EU are at a “deadlock” when it comes to discussing the UK’s financial obligations. However, he stated his belief that the two sides could make decisive progress in the next two months, leaving room for further discussions. A media report said that EU leaders are expected to tell negotiators to prepare for future trade talks with Britain at next weekend’s EU summit. Sterling made a strong rebound as investors and traders became optimistic about the future of Brexit negotiations.

The British Chambers of Commerce (BCC) said in its Quarterly Economic Survey of businesses that the British economy is showing little signs of breaking out of its lethargy. The BCC analysts stressed that it’s “extraordinary” that the Bank of England (BoE) is considering hiking interest rates in the present economic conditions. The BCC report said that political uncertainty, Brexit and currency fluctuations are hurting British businesses.

US Dollar – US Markets

The US Dollar retained its value against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) lost minor ground, coming in at 93.00. A series of data due to be released later in the day, regarding September’s consumer prices and retail sales are going to affect the US currency’s value.

Analysts expect a 2.3% reading showing that inflation spiked in September, which is above the Federal Reserve’s 2% target. In August, inflation was measured at 1.9%. Analysts suggest that the sharp rise in fuel prices, because of disruptions in production related to the hurricanes Irma and Harvey, helped inflation move upwards. Regarding retail sales in September, market analysts anticipate a 1.7% rise, in contrast to August’s 0.2% decline.

Yesterday, the Department of Labour published data regarding producer prices in September and jobless claims. On a month-to-month basis, the US producer prices index (PPI) rose by 0.4%, in line with market expectations. On an annualised basis, producer prices increased by 2.6%, which was a bit better than the 2.5% anticipated. Producer prices climbed on the back of a sharp rise (3.4%) in the cost of energy goods. ING analysts, commenting on data, noted that some Fed board members will argue that the figures were affected by weather phenomena. As the ING report stated, Fed policymakers will presumably ask for more solid data to vote in favour of a rate hike.

Euro – European Markets

The Euro remained stable against the US Dollar with the exchange rate set at $1.18. The single market currency had jumped earlier against the US Dollar on news that the ECB, according to Bloomberg sources, is considering to start cutting the qualitative easing programme (QE) from January 2018.

Bloomberg’s report included comments by officials familiar with the QE debate inside the ECB’s board. They revealed that the board is thinking about extending QE until at least next September. They noted that reducing the QE’s size to €30bn a month, almost half of what it is now, is a feasible option. The ECB declined to comment on Bloomberg’s report, but traders bought the Euro based on optimism that the central bank will tighten its monetary policy.

In Germany, September’s inflation came in at 1.8% on an annualised basis, in line with market expectations. In Italy, inflation in September remained stable at 1.1%, on a year-to-year basis, as it had been in August. Ardo Hansson, an ECB board member, said that monetary policy has to remain accommodative. Hansson noted that the ECB could be more specific about its intentions regarding interest rates, and added that it would be feasible for the central bank to buy more corporate bonds than public sector ones.

Other Currencies – Highlights

Sterling remained stable against the Australian Dollar, trading at 1.69 AUD. The Reserve Bank of Australia (RBA) Financial Stability Review (FSR) warned that hiking interest rates could hurt the indebted households. The review noted that main risks come from rising household debt amid low rates and weak income growth. However, the RBA stresses that the Australian financial system remains strong and resilient.

The Pound inched higher against the New Zealand Dollar, trading at 1.86 NZD. Business NZ published its New Zealand factory index survey for September. The index came in at 57.5, with an BNZ report commenting that the result is well above the long-term average of 53.4 and noted that it’s particularly encouraging considering the proximity of the parliamentary elections.

Sterling jumped against the Swiss Franc, trading at 1.29 CHF. A report by the Federal Statistical Office showed that producer and import prices increased by 0.8% in September, on a year-to-year basis, which is 0.2% more than what was anticipated.