Look around. The Federal Reserve has tightened policy considerably, the European Central Bank’s first anticipated interest rate hike in seven years is pencilled in for next year. Add to that the removal of the stimulus provided by numerous quantitative easing programs and it’s unsurprising that the waters are beginning to turn choppy. Put simply, the unfaltering and unwavering liquidity provisions that have been made available by public institutions have turned/are beginning to turn off the taps. With immense cash flows in the bond markets each day it is unsurprising therefore that the world’s major currencies are encountering uncharacteristic liquidity as public demand is being replaced by private purchase. Add to that canvas a Brexit, Italy’s populist government and prospective spending plan, German political instability, and Trump’s unique style of leadership, and intraday volatility less than 0.5% within GBPUSD, EURGBP and EURUSD seems like a miracle. Today, the UK cabinet was presented with the 95% completed plan for Brexit. Reflecting this risk and rumours surrounding this event, the Pound drifted lower throughout the day’s session. Given the progress on Brexit, markets are coming to expect an even more meaningful cabinet meeting next week and an impending European summit to discuss the results. The European Union this morning gave its impression of the Italian economy. The numeric impression was concerning with improving expectations for economic growth next year were overwhelmed by a budget deficit that was forecast to grow from 1.7% of GDP next year to 2.9% of GDP; a level well outside the EU’s two-decade long permissible levels. This was nothing markets didn’t know already with the EU having labelled Italy’s spending plan unacceptable for two weeks now. However, the reminder of European risk was sufficient to push the Euro back down to 1.14 against the Dollar and 0.70 within EURGBP.
Discussion and Analysis by Charles Porter