Morning Report: 31 October 2017

31st October 2017 By: Ranko Berich

GBP Sterling remains modestly bid amid the G10 FX as markets remain focused on Thursday’s interest rate decision in the UK. As we discussed yesterday, the discussion on interest rates now goes one step ahead and markets are trying to find out whether it will be a one-off hike or the beginning of an interest rate cycle. In this regard the Bank of England needs to asses if sterling’s depreciation after Brexit will be a predominant catalyst of inflation over the next few years, as opposed to the previous estimates that suggested sterling’s drop would only lead to a transitionary boost on inflation.

EUR The Catalonian crisis appears to have vanished rapidly as the euro rises against all G10 currencies but the dollar. The Catalan leaders fled to Brussels in order to find asylum. Various pro-separatist parties have indicated their intention to participate on December 21st snap election in Catalonia, which counterintuitively means that these parties are legitimising the central government actions and, therefore, that they have given up on the independence. Catalonia’s ex-President Carles Puigdemont, and other pro-separatist ex-leaders, have been indicted with charges of rebellion, sedition and misuse of public funds, which could lead to 30 years in prison. Inflation and gross domestic product data will be released at 10.30 BST.

USD Although unofficial, Trump appears to have chosen Jay Powell as the next Fed Chair. Powell is the less hawkish of the both remaining candidates, albeit slightly more neutral than Yellen. However, it is worth mentioning that Powell has defended Yellen’s prudent tilt over the last few years, both in terms of monetary policy and regulation. The Conference Board Consumer Confidence Index will be released at 14.00 BST, an important leading indicator of consumer spending, which will be critical after last Friday’s gross domestic product data showed a significant slowdown in consumer spending.

CAD The loonie remains bid since crude oil prices appear to be stabilising over $60/barrel. Should oil prices consolidate over such a critical area, and begin a new leg higher, commodity currencies could outperform significantly. Monthly gross domestic product data will be released today at 13.30 BST.

UK news

  • FT: Investors to the BoE: what comes after a rate rise? With a rate rise widely expected this week, the debate for investors is what the central bank does next. The Bank of England is on Thursday expected to deliver its first interest rate rise since the summer of 2007. For investors, that is already old news. Instead, having discounted a move by the BoE, the debate in the foreign-exchange and bond markets is whether the likely rate increase will mark the start of a tightening cycle, or will end up being a one-time reversal of what critics say was the bank’s hurried step to cut official borrowing costs in the weeks after the Brexit vote.
  • Reuters: UK consumer confidence slips in October – GfK British consumers turned slightly more gloomy in October as they remained downbeat about the economy, although they continued to splash out on major purchases, a survey showed on Tuesday. The monthly consumer sentiment index from market research firm GfK eased to -10 this month from -9 in September, matching the consensus from a Reuters poll of economists, and continued to hover near a three-year low. The survey has shown little change over the past five months and the latest reading will probably do little to alter the analysis of Bank of England policymakers meeting this week to set interest rates.
  • BBC: Bank of England believes Brexit could cost 75,000 finance jobs The Bank of England believes that up to 75,000 jobs could be lost in financial services following Britain’s departure from the European Union. I understand senior figures at the Bank are using the number as a “reasonable scenario”, particularly if there is no specific UK-EU financial services deal. The number could change depending on the UK’s post-Brexit trading relationship with the EU. But the bank still expects substantial job losses. Many jobs will move to the continent.