Discussion and Analysis by Charles Porter:
The return of data today could see an increase in volatility within many major currencies. The reading of Germany’s third quarter GDP has already provided support to the Euro, with UK inflation data also due this morning. The Pound has carried over the weakness that it incurred during the pricing in of domestic political risk. There was no indication of concern from Theresa May last night as she spoke at the Lord Mayor’s Banquet, leaving Sterling largely unchanged. Instead, a focus on a global Britain and foreign policy gave markets no clearer insight into the significance of the threat from a vote of no confidence.
Sterling Briefing: Economics vs. Politics
The return of economic data has arrived with inflation data for the United Kingdom being released in the form of the Consumer Price Index (CPI). The CPI can create interesting dynamics for a currency, with inflation usually signalling an increase in the probability of a monetary policy tightening that markets would reward with value. However, in the abnormal policy times that we currently live in, the forward guidance of the Bank of England seems so Dovish that inflation is unlikely to trigger monetary policy alarm bells. Given that inflation is widely expected to flirt with the 3% target, an open letter from Governor Carney to the UK Chancellor could be highly informative.
Whatever the Sterling dynamics that the inflation report creates, the effect will be moderated against the significant weakness (approximately 1%) that domestic political instability has created.
Euro Briefing: Economic Growth
Germany’s economic growth, as measured by quarter-on-quarter growth in Gross Domestic Product, ticked up from 0.6% in quarter two, to 0.8% in quarter three. The simultaneous reading of CPI inflation data within the Eurozone’s most systemically significant economy remained sluggish and short of the ‘just under 2%’ target. As an export-led economy, the composition of economic growth was particularly important within this publication, showing strong export, outward-facing, growth.
Growth within the German economy appears to have provided a mild tailwind to the Euro this morning, as it continues its weekly climb against the US Dollar. Later this morning, further Eurozone data is due including the ZEW sentiment survey. Meanwhile, ECB President Draghi will speak alongside other central bank leaders in Frankfurt.
Dollar Analysis: Well Behaved Markets
Over the past week, the currency cross between the Euro and the US Dollar has been rather tame. The Euro is attempting to correct its value following a monetary policy-led devaluation and is being offered ground by the US Dollar due to the apparent challenges to Trump’s Tax Reform. This morning, the boost from Eurozone economic growth statistics strengthened this trend.
The Days Ahead:
Today’s return of economic data is a trend that is set to continue throughout the week, with UK labour market statics due tomorrow before US inflation data is published. With the Federal Reserve Bank in the US widely expected to raise interest rates again in December, tomorrow’s CPI reading will be important.
In the US, the inflation-exchange rate relationship operating through monetary policy expectations is more likely to hold. Therefore, an inflation report that allows the FOMC to hike the interest rate target will be positive for the US Dollar.
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