Morning Report: 30 October 2017

October 30, 2017

GBP Sterling opens the week stronger against most of the G10 FX as markets await the Bank of England’s decision on Thursday. Expectations for a rate hike remain well above 80% and questions now turn into the features of the hike itself. If the BoE delivers a dovish hike, which would be a hike with five votes in favour and four against, sterling could actually fall after the hike. This would be due to some of the hawkish members supporting a one-off hike, rather than the beginning of a hiking cycle. If the BoE delivers a hawkish hike, with more than five members favouring a hike, or even signalling more hikes in the future, then sterling would react positively. Obviously, if at the end no hike is delivered, sterling would take a massive hit, although we still believe this is very unlikely since the latest research published by the BoE shows that the depreciation of sterling after Brexit will push inflation up for much longer than initially anticipated, which could discourage the BoE to see sterling weakness again.

EUR The euro is also strong against most of the G10 currencies, with the exception of the Swedish krona and sterling, as markets return to normal, after the Catalan crisis in Spain was largely resolved over the weekend. The Spanish government implemented Article 155, which gives them the power to dissolve the regional Catalan government, and have also scheduled new elections in Catalonia on December 21st. The established parties in in the region will now have to decide whether to disregard the new elections having been called by a “foreign” government, or participate in them, which would legitimise the actions of the Spanish government so far, and be seen as an acceptance of the defeat of their recently declared independence.

USD The dollar is lower today since it appears that Donald Trump is leaning towards Jay Powell on the Federal Reserve Chair dilemma. Powell is the least hawkish of the two possible candidates, and appears to be less keen on deregulation than Taylor, too. Trump will announce his final decision before the end of the week. The Federal Reserve meets later this week but, before that, core personal consumption expenditure and personal spending data will be released today at 13.30 BST.

CAD The loonie rallied towards the end of last week after crude oil prices jumped over $60/barril and remain above today. It appears that a positive outlook for global growth is picking up demand for crude oil, boosted as well by the OPEC cuts over the last few quarters. Gross domestic product data is the next milestone for CAD, which will be released tomorrow at 13.30 BST.

UK news

  • FT: Philip Hammond ‘between a rock and a hard place’ in Budget. IFS says chancellor is under pressure to abandon fiscal targets. Philip Hammond is stuck “between a rock and a hard place” as he prepares his first autumn Budget, facing the prospect of either abandoning his fiscal targets or ignoring growing demands for more public spending, according to the Institute for Fiscal Studies. In a new report published on Monday, researchers at the think-tank set out the challenges for the chancellor as the outlook for the economy weakens. Despite the government’s existing plans to continue squeezing public spending over the next four years, lower productivity growth is expected to push up forecasts for public borrowing. That poses a dilemma for Mr Hammond, who would struggle to balance the needs of the economy and strains on public services with his desire to cut government borrowing and debt.
  • FT: Powell leading in Trump’s Fed chair reality-TV spectacle. Serving governor would be continuity candidate but president keeps his audience on tenterhooks. Donald Trump is preparing an announcement on the next Federal Reserve chair this week with governor Jay Powell said by administration officials to be the leading candidate in what remains an unpredictable process. The US president teased the decision on Instagram on Friday, claiming that Americans were “anxiously” awaiting his announcement and that everybody would be “very impressed” with the nominee. “It will be a person who hopefully will do a fantastic job,” he said, speaking directly into the camera from the White House. Mr Trump has been deliberating between Mr Powell, the continuity candidate for the job alongside current chair Janet Yellen, and John Taylor, a Stanford economist who could radically shake up monetary policy. Mr Powell, who has served at the central bank since 2012, is a centrist who has strongly supported Ms Yellen’s cautious approach to interest rate rises as well as the gradual reduction of its $4.5tn asset holdings which began this month.
  • Reuters: Catalan crisis – a tough day at the office. Rarely has there been so much world interest on public sector workers turning up for their nine-to-five jobs. The behaviour of Catalonia’s 200,000 civil servants this morning is the latest test of where the region’s stand-off with Madrid is heading. The main group behind the pro-independence campaign has called for a campaign of civil disobedience and all eyes are on whether those in the public sector actually turn up and, if they do, whether they carry out their jobs as usual. The other potential flashpoint is the offices of pro-independence government officials and lawmakers, where the question is whether they try to gain access and whether the Catalan police, the Mossos d‘Esquadra, follow orders from Madrid to prevent them. Financial markets have their eye on a slightly longer-term game: they are up this morning after a weekend poll suggested Catalan secessionists could lose their majority in a new regional election now scheduled for December.

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