Morning Report: 24 October 2018

October 24, 2018

GBP. Speculation bounced around yesterday on whether Theresa May was going to appear today in front of the 1922 committee. The pound rallied off of flash news from Irish newspaper RTE who reported that the EU will offer Theresa May a UK-wide customs union deal as a way around the backstop. Further positivity was added to the pound after the chair of the 1922 committee, Sir Geoffrey Clifton-Brown, reported that no leadership challenge is being called for at the moment. However, late on in the session after the pound suffered from the broad risk-off move, news appeared that May will indeed appear in front of the committee this evening. This caused many to scrutinise Sir Geoffrey’s use of language, which at a glance wasn’t as certain as markets assumed.

EUR. The euro bounced around yesterday as headlines from Italy dominated Europe’s market news. Former Prime Minister of Latvia, and now a member of the European Commission, Victor Dombrovski stated that intensive talks will take place with Italy over the next three weeks to avoid increasing tensions over their draft budget. Should both sides entrench their stances, and no concessions are made from either side, the European Commission may put the Italian fiscal plans in official review via the Excessive Deficit Procedure. This morning, French Purchasing Managers Indices surprised to the upside with the exception of the Manufacturing sector. German PMI’s are released later today.

USD. Yesterday’s dominant market move occurred in US equity markets but promptly spilt into the foreign exchange markets causing a mixed dollar reaction. A rough open in Wall Street saw earnings forecast downgraded for 2 major industrial companies within the Dow Jones index. With global growth expected to moderate in the coming quarters, alongside rising trade tensions and geopolitical risk, the S&P 500 started to contract again. The move was most prominent in the Philadelphia Stock Exchange Semiconductor Index which fell 3.6% upon market opening.  The semiconductors industry is subject to tariffs and the cyclical nature of the index tends to show up blips in market conditions first. The risk-off move in the equity markets spurred the yen to post 0.34% gains against the dollar, the most out of the G10 currencies and shaved some optimism off of the pound’s rally. This week’s busy data calendar for the US starts today with an array of Purchasing Managers Indices at 14:45 BST.

CAD. The loonie remains almost static ahead of today’s Bank of Canada rate decision. The event may prove significant for the loonie despite the market aggressively pricing in a rate hike. Therefore, the announcement of the expected 25 basis point hike to 1.75% is likely to have a muted effect, but any hawkish stance by Poloz and the Bank of Canada will spur the loonie on. If the BoC becomes the second G10 central bank to embark on a well-specified hiking cycle, the Canadian dollar has room to rally despite oil prices slumping.

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