Morning Report: 28 October 2016

28th October 2016 By: Ranko Berich

GBP Sterling continued to drop off in the afternoon session yesterday, despite the morning’s strong GDP data, emphasising just how important the lingering political risk for the UK is perceived to be by the currency markets. The reality is that the UK economy has completely almost defied pre-referendum expectations for an immediate slowdown in growth, with the weak pound having provided a particularly welcome boost. Indeed, there are now calls for an official climb-down from the Treasury’s official pre-Brexit forecasts, which were part of what became dubbed ‘Project Fear’. Despite this, it should also be kept in mind that the economy is far from out of the woods just yet. The main feared potential negative impacts of a ‘hard’ Brexit are weaker trading relationships, a less flexible and skilled labour market, and a slowdown in business investment leading to a slower rate of technological advancement- all of which are effects that won’t be seen until the UK actually leaves the European Union. For this reason, markets continue to look through the consistent positive post-Brexit economic data from the UK, and the pound is likely to remain under pressure going in to the weekend.

EUR The euro had a relatively quiet day yesterday, with the only economic news being that the rate of unemployment continues to fall in Spain, indicating that at least one half of the Iberian economy continues on its path to recovery. However, with French preliminary quarterly GDP figures coming in below expectation at 0.2% this morning, as well as data showing both consumer spending and inflation in France were also below forecasts, the case is growing for extending loose monetary policy in the single currency area. As a consequence, against the US dollar in particular, the euro is likely to continue to struggle today.

USD The US dollar had an almost eerie lack of news yesterday, with unemployment figures being released in line with expectations, and no new major political developments. The price of oil continues to retrace, which has provided some support for the greenback, but this release of Advance GDP figures at 1.30pm GMT today will be the markets major focus. Expectations are for a 2.5% rate of growth, up from 1.4% last quarter.

CAD With hopes of a deal to cut oil production levels in the OPEC bloc having faded, and the Bank of Canada maintaining its dovish tone, the Canadian dollar is still struggling to buck its long-term weakening trend. In fact, the USDCAD rate has now seen its average rise almost every month since April, and though traders seem reluctant to sell out of the loonie at the moment, if we don’t see any positive data coming out from Canada soon then it won’t be long before we do see another sharp fall in CAD’s value.

UK News

  • Reuters. UK consumers worry as weaker pound raises prices.
  • Telegraph. Tony Blair suggests a second referendum to reverse Brexit ‘catastrophe’, as he calls on Remainers to moblise.
  • Daily Mail. Bank of England to shelve record rate cut and QE as UK economic growth holds up well after Brexit vote.