Will Sterling’s Ten-Week High Last?
Sterling is higher against the Euro due to the political turmoil in Germany: the shocking election results weakened Angela Merkel’s position as the right-wing populist AfD came in third place. Theresa May’s hopes for reanimating the Brexit negotiations proved to be just a vision since Michel Barnier and David Davis continued to hold their ground and refused to take a step back from their initial positions.
The price of Brent crude oil hit $59 per barrel in the morning, which is a two year-high. Traders became worried when the Turkish President, Tayyip Erdogan, threatened to cut off a pipeline that transfers oil from northern Iraq to the Turkish port of Ceyhan. Erdogan’s threat came as Kurdish people living in the north part of Iraq staged a referendum for independence, defying orders from the government in Baghdad. Kurdistan is an area expanding on four different Middle East countries, with Turkey being one of them.
Pound Sterling – UK Markets
Today, the Pound jumped against the Euro, hitting a ten-week high, with the exchange rate set at €1.14. Sterling gained ground against the US Dollar with the exchange rate set at $1.34.
The Pound’s rise is one of the few things that the British government can be happy about. The first day of negotiations between the UK and the EU in Brussels ended in a deadlock. Theresa May’s vision of a post-Brexit transition period in exchange for a sum of money that would cover the UK’s obligations to the EU, got shattered. Michel Barnier, the EU’s chief Brexit negotiator, stressed that there will be no transition deal talks until problems such as the divorce bill, the Irish border and citizen rights are solved. Brexit Secretary, David Davis, counter-attacked by saying that the divorce bill can’t be settled without discussing simultaneously about the future of the EU-UK relationship.
The British Bankers’ Association (BBA) published the number of August’s mortgage approvals which came in at 41.807, surpassing market expectations and hitting a six month-high. In the past July, mortgage approvals had hit a nine-month low. UK Finance, which represents 300 of the leading financial services firms published its August report. Data included in the report showed that consumer credit growth in August was at the lowest level since April. Personal deposits increased by 2.2% in August, on a year-to-year basis, which, according to UK Finance, is the lowest annual rate since May 2009.
US Dollar – US Markets
The US Dollar jumped against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) remained stable at 92.68. Janet Yellen, the Fed’s Chair, is going to deliver a speech later in the evening, in Cleveland, with economists waiting to hear if she will give any clues on the issue of a December rate hike.
Yellen’s term will expire in February, while President Trump is weighing on whether to keep her or replace her with Gary Cohn, who is the National Economic Council Director. The Chicago Fed President, Charles Evans, said that he isn’t going to vote in favour of another rate hike until there are clear signs of inflation rising. Evans expressed his concerns that “the evidence is not strong that the economy is on the precipice of escalating inflation.” Evans noted that “rates can go up in a gradual and cautious approach.”
However, William Dudley, who is the New York Fed’s President, appeared more optimistic about the condition of the US economy and the possibility of an interest rate hike. Dudley, speaking in front of college students in New York, said that “with a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilise around the 2% objective over the medium term.” Dudley, who is considered Janet Yellen’s close ally, added that the Fed will likely continue to remove monetary policy accommodation, gradually. It should be noted that US inflation has been almost continuously under 2% since 2008.
Euro – European Markets
The Euro continued to drop against the US Dollar, hitting a one month-low, with the exchange rate set at $1.18. The single market currency seemed unable to recover from the blow it suffered when German election results showed that Angela Merkel’s CDU share weakened and the party will be searching for allies to form a coalition government.
The European Central Bank’s (ECB) head Mario Draghi spoke in front of the ECON Committee of the European Parliament (EP). Draghi stated that the economic expansion is now firm and broad-based across Euro-area countries and sectors. The Italian banker didn’t mention anything about potential changes in the asset purchase programme, as the ECB is preparing to make announcements on its meeting at the end of October. Draghi noted that the downside risks to the Eurozone growth are mainly geopolitical, adding that the Eurozone is better prepared to face a Chinese economic slowdown now than it was two years ago.
The German Bundesbank released data which showed that prices of imported goods in August, increased by 2.1% on an annualised basis, in line with market expectations. The Business Climate index, published by the INSEE, ticked lower in September after hitting multi-year highs during the summer months. An ING report suggested that the German election result poses a risk to the efforts of Angela Merkel and Emmanuel Macron for deeper integration.
Other Currencies – Highlights
Sterling continued to strengthen against the Australian Dollar, trading at 1.69 AUD. Michele Bullock, the Assistant Governor of the Reserve Bank of Australia (RBA) commented on the RBA’s monetary policy. Bullock said that high levels of household debt leave families vulnerable to a potential economic downturn, adding that the RBA is taking this problem into consideration when forming its monetary policy. The Australian Treasury revised the cash deficit for 2016/2017 lower from the previous forecast published in May, saying that increased tax revenue and a cut in welfare spending helped the reduction.
The Pound kept on gaining ground against the New Zealand Dollar, trading at 1.86 NZD. The Kiwi suffered on news that the trade balance deficit increased in August. Imports surged, especially those of crude oil, but TDS analysts suggest that August is traditionally a deficit month since it is in the middle of winter. The ANZ Business Confidence Index hit zero in September, with experts attributing the fall to the parliamentary elections’ effect.
Sterling kept strengthening against the Swiss Franc, trading at 1.30 CHF. The Swiss National Bank (SNB) announced that total sight deposits rose by CHF4bn in the week ending on 22nd September. Economists consider the increase an indicator for the SNB’s interventions in order to curb the strength of the national currency.