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Pound rises as Merkel extends olive branch to May

By Jake Trask

UK Retail Sales missed target yesterday morning dragging sterling lower throughout the day. September saw a 0.8% drop for the month with the report highlighting rising costs in all store types was squeezing spending power. Year on year price growth stood at 3.3% the highest since March 2012 giving another illustration of how the pounds drop since the EU Referendum is affecting consumers. In the afternoon we saw US Unemployment Claims post 222k for last week, the lowest reading since March 31, 1973 when it was also 222k. After posting nearly 300k in the aftermath of Hurricane Harvey, the quick recovery indicates the economic damage from Harvey and Hurricane Irma which followed has been relatively contained. The Philly Fed Manufacturing Index was published at the same time which posted its third monthly gain rising from 23.8 to 27.9 for September. The report stated: The survey’s current indicators for general activity, new orders, shipments, and employment all remained positive this month. Both of the survey’s current labor market indicators showed notable improvement. The indexes assessing the six-month outlook suggest that firms remained optimistic about future growth.” Today’s big event is the EU leaders summit in Brussels where it is widely expected to be confirmed that not enough progress has been made in negotiations thus far to open discussions over a future trade relationship. A meeting is scheduled later for EU leaders (excluding the UK) to discuss Brexit amongst themselves; should any leaks that a future trade arrangement has been a topic of conversation then we could see sterling rally as a result. There has already been some positive news overnight as Angela Merkel was quoted as saying she was keen to see concessions from the UK in an effort to begin discussions re: trade by the December meeting. GBP/USD has risen back above 1.31 on the report. Today’s only data of note is UK Public Sector Net Borrowing and Existing Home Sales from the States. GBP/USD currently trades at 1.3130 (midmarket). 

With the impasse between Spain and Catalonia ongoing, Madrid is expected to start taking power back from the autonomous region this weekend after the unofficial independence referendum earlier this month. European Council President has advised that there will be no EU action re: the situation however said the standoff was “concerning.” French President, Emmanuel Macron and German Chancellor, Angela Merkel have publicly stated their support for Spanish PM, Mariano Rajoy as the all congregate in Brussels. There is no data from the EZ today so movement will be dictated by politics. GBP/EUR is at 1.1120 and EUR/USD is at 1.1805 (midmarket rates). 

AUD/USD has remained range-bound all week finding support around the .7810 handle after last week’s jump on poor US CPI numbers. The next event of note for the Aussie will be Tuesday nights inflation data. CPI currently trades a little under target in Oz at 1.9% y/y so an uptick into its target range of 2-3% should see the local buck rally adding to the argument for a tightening of monetary policy in 2018. GBP/AUD is at 1.6745 (midmarket). 

This week’s whipping boy in the FX markets has been the Kiwi dollar which has been hammered on the news that 37 year-old Jacinda Ardern is to  lead a Labour/New Zealand First/Green centre-left coalition as Prime Minister. Markets are concerned the new PM will raise taxes which has seen the Kiwi dumped with NZD/USD plummeting from .72 to .6970 this week. We may have seen the worst of the drop given the pace of the fall so the adage “sell the rumour buy the fact” may come to fruition however markets are clearly concerned over policies the new administration may announce. GBP/NZD is up to 1.8810 (midmarket) around a five cent jump this week!