Sterling continued the gradual downwards trend seen against the US dollar over the past few days yesterday, ahead of today’s Bank of England meeting. Now that no-deal Brexit risk has been all but completely removed, the Monetary Policy Committee will have to decide if it will follow other central banks into “insurance” rate cuts in the face of worsened global growth. This is unlikely, given that the latest October Brexit deadline is likely to cause volatility in UK data due to stockpiling, and a potential boost to sentiment now that no-deal has once again been avoided. Even though a cut is unlikely at today’s meeting, signs of weakness in the UK economy such as weakening survey data and falling job vacancies may prompt the MPC to warn of worsening domestic risks. Sterling options markets are trading as if participants are not expecting today’s meeting to cause much immediate sterling volatility: implied overnight volatility for GBPUSD is trading at 8.53%, the lowest reading on the day of an MPC meeting since 2014.


Germany’s factory orders surprised to the upside yesterday posting 1.3% growth MoM in September but failed to turn-around the annualised figure which remains deep inside contractionary territory at -5.4%. The final reading of Germany’s October PMIs also surprised to the upside along with Italy’s, offsetting a downward revision in Spain’s composite reading. The positive surprises continued with the reading of September’s retail sales data at 10:00 GMT, which posted a 0.1% MoM increase compared to expectations of a flat reading. The data failed to prompt a euro rally, with EURUSD floating lower as the greenback continued to surge. Today’s risk-on sentiment has helped the pair climb above yesterday’s open, however, despite the fall in Germany’s industrial production data in September. There is little in the economic calendar for the single currency today, with the only notable release for the rest of the day being the ECB’s economic bulletin at 09:00 GMT, and updated economic forecasts from the European Commission at 10:00.


Patience was the buzzword for yesterday’s G10 price action as investors enjoyed a slump in volatility after an intense period of Brexit headlines and Fed repricing due to Trade War developments. The dollar traded in a tight range, sustaining minor losses from the Scandies and haven currencies. This morning’s session has started with a bit more action than yesterday’s after it was announced that the US and China will lift tariffs in phases, with the first bout of relief coming after the approval of the phase one deal – which is yet to be signed after the APAC meeting was cancelled due to political unrest in Chile. This would mark the first material de-escalation in the Trade War, with previous agreements merely delaying or cancelling proposed tariff increases. The dollar is marginally weaker as US Treasuries declined, pushing yields higher, with the riskier G10 currencies reclaiming yesterday’s losses. There is little in the way of data for the greenback today, with just the Dallas Fed’s Kaplan speaking at 18:05 GMT tonight.


The loonie has joined the risk rally this morning following news that the US and China will begin to lower tariffs in stages beginning with the phase one trade deal. The rise in US Treasury yields from the announcement, as investors begin to price lower expectations of immediate Fed rate cuts, has sent the front-end yield spread on US-Canadian bonds into positive territory. The 2-year spread is arguably more volatile than the exchange rate itself at the moment. Despite the US dollar becoming a marginally higher-yielding currency in the shorter-run, USDCAD has begun to reverse recent gains this morning as the loonie rallies with oil markets. WTI has halved yesterday’s losses following the dramatic 7.3m barrel build in inventories reported by the Department of Energy as risk-on sentiment ripples through markets this morning.



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