01/11/2018 - Pound Rallies On Brexit Expectation

GBP

Sterling rallied on Wednesday after Britain’s Brexit Secretary said a divorce deal with the European Union could be reached by the end of November. Dominic Raab’s suggestion that a deal is imminent saw the pound trade up as much as one percent against the euro and the dollar after weeks of losses.

Traders’ fears about the lack of progress in Britain’s EU divorce talks less than five months before Brexit has led to the currency weakening 4 percent in October. But a deal is now firmly in sight, Raab said in a letter dated Oct. 24 to the chairman of parliament’s Brexit committee, although the issue of Northern Ireland remains.

Investors are turning their attention to a Bank of England monetary policy meeting on Thursday, when it is expected to keep interest rates on hold and detail conditions necessary for policy tightening.

The BoE’s push to normalise policy in the face of significant risks to the British economy from Brexit has been a source of puzzlement for some investors. After Raab’s remarks became public, sterling surged versus the dollar before settling up half a percent on the day. Versus the euro it rose to its largest daily gain since August.

Options pricing is pointing to increased concerns about the UK outlook heading into 2019, and mounting angst over Brexit means the market is no longer fully pricing-in an interest rate hike next year.

USD

The dollar edged up to a fresh 16-month high against a basket of key currencies on Wednesday on the back of continued U.S. economic strength, putting the greenback on pace for a seventh straight month of gains.

The dollar has enjoyed a boost from robust economic reports, including data last week which showed the U.S. economy slowed less than expected in the third quarter.

The ADP national employment report on Wednesday showed that U.S. private sector payrolls increased by the most in eight months in October, suggesting overall job growth accelerated this month after Hurricane Florence weighed on restaurant and retail employment in September.

The U.S. Federal Reserve increased interest rates in September for the third time this year and is expected to raise rates again in December, even as the European Central Bank’s plan to raise rates late next year may be challenged by alarmingly slow growth in the euro zone region.

Key Announcements

09.30 – GBP: Manufacturing PMI; Forecast at 53.1 against previous of 53.8
12.00 – GBP: BOE Inflation Report
12.00 – GBP: MPC Official Bank Rate Votes
12.00 – GBP: Official Bank Rate Vote; Forecast no change at 0-0-9
12.00 – GBP: Monetary Policy Summary
12.00 – GBP: Official Bank Rate; Forecast no change at 0.75%
12.30 – GBP: BOE Governor Carney Speaks
14.00 – USD: ISM Manufacturing PMI