Morning Report: 31 October 2018

31st October 2018

GBP. Sterling continued to get smashed by the dollar yesterday, despite no major political headlines and little in the way of data. Credit rating agency Standard & Poors did reiterate that a no-deal Brexit could cause a recession for up to and over a year along with a likely downgrade of the UK’s sovereign credit rating. This morning, however, sterling has started a minor rally despite a business optimism index released just after midnight showing businesses are the most pessimistic they have been all year. The Consumer Confidence index also made for bleak reading, but this is much expected as Brexit uncertainty continues and negotiations approach crunch time. The minor bounce in GBPUSD suggests sterling may have found some support, for now. It is worth bearing in mind that with so much market pessimism priced into the pound at the moment, it makes sterling ripe for a sharp rebound should a full provisional agreement between the UK and EU be announced at any point in the coming weeks.

EUR. The euro fell a quarter of a percentage point against the dollar but continued to make ground against the fragile pound yesterday. Inflation readings in Germany continued to tick upwards to 2.5% YoY, but this may have been offset by an undershoot in Italy’s Gross Domestic Product release for Q3. Despite being a preliminary reading, and therefore largely subject to revision, the fall in growth levels from 1.2% to 0.8% hammers home the Italian coalitions need to loosen the purse strings. The populist government blamed the previous government’s submission to the EU for the slumping figure while the EU continued to voice concerns over Italy’s debt accumulation. Today the Eurozone-wide Consumer Price Index is released alongside September’s Unemployment Rate. CPI is expected to marginally increase to 2.2% for the single currency members as a whole.

USD. Another strong day for the dollar yesterday as the DXY dollar composite index closed at its highest level for 16 months. The greenback lost out against risk sensitive currencies such as AUD and NZD despite economic data suggesting China’s economy begins to slow down in light of trade protectionist measures. The dollar and Australasian currencies were spurred on in a risk-on move as equities capped off their worst month in six years with a bang. In domestic politics, Trump vowed to abolish birthright citizenship from law only days prior to the mid-term elections. Currently, the Republicans stronghold of the house looks tentative, but the ramping up of immigration reform may start to tilt the polls in their favour. Little in the way of data is released for the dollar today, with the calendar being loaded towards the back-end of the week.

CAD. The loonie joined the Australasian currencies in making gains against the greenback yesterday. Bank of Canada Governor Stephen Poloz told the House of Commons Finance Committee yesterday that the central bank needs to keep raising interest rates at an appropriate speed – but it may need speeding up from the previous pace as the economy continues to produce at almost full capacity. This is what markets were expecting at the BoC’s last monetary policy meeting, but Poloz wasn’t as direct as he was yesterday. The hawkish comments caused the loonie to gain 0.18% despite oil prices remaining flat.