Morning Briefing

Discussion and Analysis by Charles Porter:

Sterling markets have opened weaker this morning following a budget that was overshadowed by pessimistic growth forecasts. Sterling markets reacted ambivalently to the second reading of third quarter Gross Domestic Product (GDP). Measuring economic growth, the statistics release showed no change. Currency markets are showing a mixed message this morning showing considerable early morning volatility. There were decisive moves overnight with the Pound Sterling and the Dollar weakening across the board, while the Euro gained approximately 0.15%. Yesterday evening, the minutes of the Fed’s November 1^st monetary policy decision were released, creating a mixed but negative outlook for the US Dollar.

Sterling Briefing: Budget Overshadowed

Yesterday’s budget was delivered to the House of Commons with considerable showmanship and bluff. The Chancellor’s hand contained little more than off-suit low cards – 1.5 and 1.3 to be precise. However, the chancellor managed to find a concealed rabbit within the deck, admirably silencing the qualms of critics and the public alike. Hammond confronted the housing challenge confidently. Many will argue that the policies were shortsighted and do not confront the systemic problem of low housing supply and reinvestment that the UK has achieved. However, in terms of a political event for the Conservative Party and cabinet to rally behind, the Autumn budget just about managed.

The Pound fell by around 0.25% during the Chancellor’s speech, before ending up in positive territory when the speech was concluded. The conclusion of such a high salience speech allows Sterling to appreciate because it will necessarily reduce the volatility and anticipation that markets hold. The Chancellor presented growth forecasts that slashed GDP growth by 0.5% this year and in 2021. With the political uncertainty that has surrounded the incumbent government building, this budget had to be a resounding success. The last thing the Pound needed was a major January cabinet reshuffle from a lack of ministerial confidence.

Euro Briefing: European Confidence

The Euro has been one of the only winners in this morning’s trading session. One probable cause is its temporary escape of political and economic challenges that are becoming increasingly apparent in the UK and US economies. The Euro has gained around 1% against the US Dollar since the beginning of this week, correcting back towards the 1.20 levels we saw in September.

This morning, IHS Markit’s Eurozone soft data index was released. The survey-based data defied dominant market expectations for a worsening of the services and manufacturing indices. The consensus forecast would have seen the aggregated soft data index for the Eurozone retreat minimally. In contrast, the composite purchasing manager’s index increased to 57.5, up from October’s reading of 56. The soft data saw the Euro spike mildly as expectations were priced out. The gains survived morning trading.

Dollar Briefing: Conflicting Messages

Yesterday evening, at 19:00BST, the minutes from November’s Federal Open Market Committee meeting were released. A December rate hike in the US is heavily priced in by the market and widely taken for granted. Yesterday’s release affirmed this sentiment, confirming the members’ commitment to raising the target interest rate band next month. What is equally important to the value of the US Dollar and the shape of the US yield curve is future monetary policy expectations.

The minutes show that Janet Yellen’s more dovish comments, that were expressed during her public conversation with Sir Mervyn, are shared by the entire FOMC. The minutes revealed that members are concerned inflation has disappeared for longer than previous envisaged. With some market participants pricing in up to four US rate hikes next year, the news was negative for today’s US Dollar.

The Days Ahead:

From a data standpoint, the week should end with little drama. However, as Germany’s incumbent Chancellor, Angela Merkel, speaks with rival SPD-leader and former EU Parliament President, Martin Schulz, about a potential coalition, we wait to see if Germany’s political impasse will be relieved – expectations are minimal.

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