Discussion and Analysis by Charles Porter:
The UK labour market remains healthy. Yesterday’s statistics release reflected the UK labour market in quarter three of 2017. The headline change was a moderately sharp fall in employment. However, when contextualised, this change looks insignificant due to the sustainment of a hyper-low unemployment rate, unparalleled for decades. Therefore, Sterling traded roughly unchanged at the release. The most important variable at present, wage growth, came in unchanged at a yearly 2.2%. A smattering of positive US data yesterday afternoon similarly left the dollar relatively unsupported.
Sterling Briefing: Brexit and Interest Rates
Yesterday afternoon, we travelled over to the London School of Economics to bring you live updates as Deputy Governor Dr. Ben Broadbent spoke on the theme of Monetary Policy and Brexit. One member of nine decision makers on the Monetary Policy Committee (MPC) of the Bank of England, Dr. Broadbent provided a surprisingly hawkish (hike-biased), yet uncertain, view of monetary policy amidst Brexit.
The forward guidance contained within the Bank’s monetary policy decision on 2nd November sent the Pound spiralling downwards. This guidance suggested that rates were likely to rise only twice over the next three years. Higher interest rates generally create value for a currency, and thus the Pound lost value as its rate threatened to drag.
Yesterday’s event revealed that interest rates are likely to be far more malleable than the MPC made it appear. Dependent upon the convergence of household and market sentiment over Brexit, interest rates could raise faster than previously believed. As many BoE members head to Liverpool, the Pound could experience upside gains if Dr. Broadbent’s colleagues on the MPC profess a similar, hike-biased, view.
Euro Briefing: Medium Term Review
Mid-April saw the beginning of a consistent and predictable bear (downward) trend in the value of the Pound Sterling with respect to the Euro (GBPEUR). Up until the start of September, the Pound lost, on average, 2.14 percent each month. This staggering trend would have seen Sterling fall to a value of parity against the Euro as soon as December; one Pound would equal one Euro.
However, largely down to Bank of England action, the seemingly relentless bear trend abated, allowing the Pound to find a new support. Following a Bank of England policy change a couple of weeks ago, Sterling has entered into a comparable, if not more severe, downward spiral that would threaten to achieve parity by February. While markets may try, this doom and gloom appears overplayed.
Dollar Briefing: Ambivalence
The US Dollar is braced for the release of industrial production data this afternoon in addition to November’s Philadelphia Fed survey and business outlook. The US Dollar appears to be facing dichotomous pressures that are each struggling for supremacy.
Yesterday saw the release of highly positive and salient inflation data, however, no such appreciation within the Dollar. Similarly, US retail sales performed well, however, failed to translate into Dollar strength. The non-conversion of positive data is likely due to the uncertain journey of the tax reform effort and thus, once again, politics matters.