Another day, another article on the pound that I am forced to write on as volatility continues to remain high as market participants react to incoming Brexit-related headlines ahead of UK Prime Theresa May’s key cabinet meeting later today. Meanwhile, today’s European data have been far from great, while Italy’s ongoing stand-off with the EU remains unresolved. Investors are looking ahead to US inflation data in the afternoon, although it is the British pound and Brexit that will remain the key focal points.
Pound rally falters as UK PM May faces cabinet showdown on Brexit deal
Yesterday saw the pound surge higher after the UK government finally secured draft terms with the EU for Britain’s withdrawal from the bloc. However, once again, sterling has been unable to hold on to its gains. Ahead of UK Prime Theresa May’s key cabinet meeting later today, doubts have risen whether she will be able to win her colleagues' support for the draft Brexit agreement as some Brexiteers fear it will keep the UK locked into EU rules for many years to come. There are also concerns that Theresa May will not survive as Prime Minister if she loses the vote today. If she were to resign, then political uncertainty would rise significantly further which could hit the pound really hard. But even if the cabinet were to sign off the draft agreement, it will still have to be ratified by the remaining 27 EU member states and then the government will face a battle to win UK parliament's backing. This might prove to be a difficult task to achieve, as some Tories have already vowed to vote against it while the DUP has also expressed concerns. So, whichever way you look at it, Brexit-related uncertainty is unlikely to go away anytime soon. As a result, the pound will remain highly volatile and pretty much a headline-driven market for the foreseeable future.
Euro undermined as Italy’s stand-off with EU remains unresolved
With Brexit uncertainty remaining elevated, both the pound and to a lesser degree the euro have fallen back today. The euro was also undermined by ongoing concerns over the stand-off between the EU and Italy over the latter’s 2019 budget. The latest situation is that the Italian government has told the European Commission that it would go ahead with its planned budget and so it will stick to its budget deficit of 2.4% and a growth forecast of 1.5% for next year. The EU has replied that it will publish an opinion on it on 21 November. The longer the stand-off with the EU remains unresolved, the more likely the euro will remain under pressure.
UK CPI eases but attention remains on Downing Street
Meanwhile UK inflation was softer with the headline CPI printing 1.9% vs 2.0% expected. Other measures of inflation were mixed with core CPI in line, RPI weaker and PPI input stronger than expected. Overall, though, not many people really paid any attention to UK data as the focus remained firmly on incoming headlines from Downing Street.
German economy contracts in Q3 and risks falling into recession in Q4
This morning we had the latest Eurozone GDP estimate, which was in line with the expectations at +1.7%, and industrial production, which fell 0.3% on the month – although this was slightly better than expected. But the key headline was that German GDP contracted by a larger than expected 0.2%, its first negative quarterly reading in three years as car production collapsed. With downside risks having increased sharply in recent times (e.g. EM currency crises and China slowdown hitting demand), Q4 GDP could register another negative number and thus put the Eurozone’s economic powerhouse into the official recession territory of two consecutive quarters of negative growth.
US inflation unlikely to be game-changer for dollar
Looking ahead, US CPI is today key data in the afternoon. Headline CPI is seen rising 0.3% vs. 0.1% last, with core reading expected to climb 0.2% vs. 0.1% previously. However, unless we get a significant outlier, today’s US inflation data should have little impact on the dollar. After all, the market is almost fully assuming already that the Fed will maintain its once-a-quarter tightening cycle for the next few quarters.