Morning Report: 24 October 2017

24th October 2017 By: Ranko Berich

GBP Sterling lost traction overnight as attention diverts elsewhere. In the meanwhile, the UK awaits more details from the EU in relation to the second stage of the Brexit negotiations which will include discussions about a trade deal and a transitional arrangement. Elsewhere, the Bank of England published a new piece of research yesterday, reflecting increasing concerns about the future of inflation in the UK. According to the study, the pass-through effect of sterling’s depreciation into domestic prices has been much more severe than initial models forecasted, and could last years rather than quarters. The probability of a hike in November are high, as markets foresee five members of the Monetary Policy Committee—out of nine—voting for a rate hike. We still expect a hike next month.

EUR The single currency held firm despite the Catalonian crisis. Catalan separatists will meet on Thursday in order to discuss the answer to the central government’s decision to supress Catalonia’s autonomy. However, Carles Puigdemont is thinking about going to Madrid himself to speak in front of the upper chamber of the Senate in order to plead against the implementation of Article 155, which allows the central government to supress a regional autonomy. The likelihood of Puigdemont coming to Madrid could be a starting point for a debate, although this is still far from certain. The Eurozone’s manufacturing Purchasing Managers Index jumped again in October reflecting the strength of the sector in the region, reaching 58.6, its highest reading since February 2011.

USD Since yesterday, the dollar has slipped against most major currencies. House and Senate leaders have an ambitious schedule for drafting and releasing their tax legislation. Representative Mark Meadows said he’s been promised that the House Ways and Means Committee will release its plan about seven days after Thursday’s vote on a budget resolution. President Trump said he’s “very, very close” to naming his nominee for Fed chair. The decision may have large implications for the dollar over the next few quarters depending on the inclination—hawkish or dovish—of the chosen Fed Chair.

CAD The loonie continues to slip as wholesale sales in Canada fell sharply below expectations. Markets have started pricing in the likelihood of a much more dovish hold by the Bank of Canada on Wednesday, when the Bank of Canada’s Monetary Policy Committee will meet to decide on interest rates. No data will be released today.

UK news

  • FT: Bank of England blog indicates mounting concern over inflation. Research on currency depreciations boosts case for interest rate rise. Above-target inflation and a squeeze on living standards are likely to be features of the British economy for years to come following sterling’s sharp depreciation since the Brexit vote, according to a blog by Bank of England staff published ahead of next week’s monetary policy meeting. The staff research suggests that currency depreciations in practice have almost double the effect on raising prices than the central bank’s main models predict, even if there is no pass through to wages and domestic costs. The research, published on the BoE’s Bank Underground blog, will give more ammunition to the hawks on the Monetary Policy Committee, who want to increase interest rates to keep the inflation forecast close to the 2 per cent target in two to three years’ time.
  • FT: Tusk warns May future of Brexit is up to UK. One of the EU’s most senior politicians has warned Theresa May that the ultimate outcome of Brexit is for Britain to decide, not Brussels, after the British prime minister told her parliament she was waiting for the EU to decide the future relationship. Donald Tusk, who chaired last week’s EU summit as European Council president, raised the pressure on Mrs May, who has been buffeted by infighting within her own party over Brexit’s ultimate outcome, by saying it was her government’s responsibility to decide how negotiations would proceed. “This is in fact up to London how this will end: with a good deal, no deal, or no Brexit,” Mr Tusk told the European Parliament in a post-summit report.