Morning Report: 30 October 2018

October 30, 2018

GBP. Sterling sat comfortably in the red for another day after the final UK budget before the Brexit deadline in March was released. The budget showed an increased cost to the UK economy if a turbulent Brexit should occur. Philip Hammond reserved a £15bn buffer to allow for a no-deal Brexit, which many saw as a political manoeuvre to increase pressure on the Eurosceptic faction of the Tory party. Sterling’s steep decline over the second half of October doesn’t look set to ease up in the coming week. The Bank of England’s rate announcement and inflation report will undoubtedly avoid speculation on Brexit scenarios, and with a hard pass on a rate change expected by the market, “Super Thursday” may not prove to be so super for sterling.

EUR. The euro rebound seen on Friday all but evaporated yesterday as German Chancellor Angela Merkel announced she will not make herself electable as the new leader of the Christian Democratic Party after she finishes her term in 2021. Markets seemed unpleasantly surprised by the announcement of the end of the Merkel era, which –  in all honesty – had to come at some point. The fact that the single currency reacted to this unavoidable message goes to show that cracks in the fundament of the European Union still need attention and without the well-respected German leader it will be harder to rally support across Europe for the needed reforms. Today brings us back from politics into the realm of data releases, with German Preliminary Consumer Prices released per state all throughout the morning, the first reading of Eurozone Q3 growth at 10:00 GMT and an Italian 10-year bond auction somewhere during the day.

USD. The buck was in the green against most major currencies yesterday, as news leaked that the US stands ready to implement tariffs on all of China’s exports to the US currently not tariffed if talks between Donald Trump and Chinese President Xi Jinping on trade don’t bear fruit next month. Later during a Fox interview, Trump’s comments were seen as slightly positive for risk, when he said he sees a “great deal” with China. Core Personal Expenditures, the Federal Reserve’s favoured inflation gauge, showed a 0.2% growth for October, higher than the 0.1% expected and above the flat growth of last month. The release is not directly a game changer, but may be just another nail in the coffin for the doves who hoped US inflation would begin to level off after its recent acceleration. Today has the Conference Board Consumer Confidence as the main US release at 14:00 GMT.

CAD. The loonie suffered further blows from the US dollar yesterday but has reclaimed yesterday’s lost ground this morning ahead of August’s Gross Domestic Product reading tomorrow. With oil prices remaining below the $70 a barrel level, the loonie may have to find strength in an economy producing above potential. Tomorrow’s GDP reading won’t include the effects of the USMCA trade deal, with a 0.0% MoM increase expected, but is forecast to continue growing at 2.4% YoY. Any positive surprise in this week’s data will likely send USDCAD lower.

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