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Foreign exhcange market report and preview for November 08.
Pound Sterling treads water near multi-week highs against the Euro and U.S. Dollar with markets maintaining the view that a Brexit deal is in the offing.
The calendar is empty and global sentiment (the U.S. Dollar pullback) and Brexit will remain in control of this currency.
Fortunately, for Sterling bulls the news is supportive at present thanks to reports suggesting the most complete version of a proposed Withdrawal Agreement can now be shown to members of the Cabinet.
Markets are of the belief that a deal can be done by year-end but are wary that the next test will immediately become whether or not the Government can pass any agreement through parliament.
Therefore, those expecting a surge in Sterling on a deal being struck might have to put their plans on ice: opponents to any Brexit deal brought back from Brussels are legion and come from retainers, Brexiteers, Labour, the SNP and the DUP.
We can look forward to a Parliamentary web of interests that could keep anxiety levels elevated over coming months.
We have economic forecasts for the Eurozone out today and we will be interested to see just how much growth the European Central Bank and European Commission are forecasting when they release their latest assessments.
ECB forecasts are released at 09:00 G.M.T. and the numbers will come against a background of slowing Eurozone economic growth trends; something that has put a cap on the Euro over recent weeks.
The forecasts presented by the ECB could be instrumental as should markets pick up any signs of concern then they will immediately question whether or not the ECB will in fact be able to raise interest rates in 2019.
This expectation has been a fundamental support of the Euro over recent months; without it the currency could struggle.
The European Commission's economic forecasts are out late-morning London time. In the May edition the Commission raised their forecasts; we will be interested in seeing whether this time around the forecasts will require downgrading.
If the message from the forecasters is a dour one we would expect the Euro to struggle and we find it little wonder that the currency has failed to take material advantage of the U.S Dollar's woes following the U.S. midterm elections.
The U.S. Federal Reserve Open Markets Committee delivers their latest verdict on interest rate settings and their view on the outlook for the economy.
Markets are not expecting an interest rate rise at the current meeting and therefore it will be the guidance on the economy and future policy moves that will matter.
"I doubt if there will be many changes at all, because the economic situation hasn’t changed that much. There was a slight slowdown in US inflation since the last meeting, but all measures remain at or above the Fed’s 2.0% target," says Marshall Gittler, a strategist with ACLS Global.
Therefore the Fed won’t have to change their comment that inflation measures “remain near 2 percent.”
"With few if any changes likely in the statement and no press conference afterwards, I expect this to be a comparatively uneventful FOMC meeting. At most, they may make a technical adjustment in the interest rate that they pay on excess reserves, but I don’t think that would have much of a broader impact on markets," adds Gittler.
The Dollar is on the back-foot amidst market concerns that now Congress is in deadlock the prospect of further fiscal stimulus is unlikely.
"At the margin, the outcome of the Midterm elections in the US will be to hinder further fiscal easing, increasing the likelihood that the economic cycle is peaking, but leave the President free to continue his trade policies. In all, that's a slight negative for the dollar, though not against the most trade-sensitive currencies," says Kit Juckes, foreign exchange strategist with Société Générale.
The New Zealand's short-term appreciation continues with a fresh boost coming from the Reserve Bank of New Zealand overnight.
The RBNZ delivered a slightly more hawkish tone on the outlook than markets had been expecting; lending the NZD a further push higher in the process.
In their guidance, the RBNZ removed the explicit language about the possibility of a rate cut – “the direction of our next OCR move could be up or down” – and replaced it with the somewhat more ambiguous “the timing and direction of any future OCR move remains data dependent.”
"Since the data in New Zealand are already running ahead of the RBNZ’s forecasts, particularly with regards to the labour market, that suggests little chance of another cut," says Gittler.
The Bank also raised its inflation forecast slightly while leaving its interest rate forecast unchanged. It also repeated that it expects to keep the Official Cash Rate (OCR) unchanged “into 2020.”
Money markets are pricing in a 77% chance of a rate hike by November 2019, several months earlier than the RBNZ is.
They also now see almost no chance of an interest rate cut on the horizon.
"However, the RBNZ’s own figures show that it is willing to tolerate higher inflation rather than higher interest rates. I think that at some point the market will be disappointed with the RBNZ’s reaction function and send NZD lower," adds Gittler.
There are housing statistics due out of Canada today with housing starts due out at 13:15 G.M.T. and the new housing price index being updated at 13:30 G.M.T.
The former is forecast to show a reading of 200K, the latter a reading of just 0.1%.
"Canadian housing starts are expected to pick up a bit after the fall in September, but not to recover to August’s level. In other words, the gradual downwards trend is expected to continue," says Gittler, adding:
"The combination of these two indicators is quite in line with the Bank of Canada’s view that “Households are adjusting their spending as expected in response to higher interest rates and housing market policies” and as a result, “housing activity across Canada is stabilising.” It shouldn’t deter them from hiking again in January. CAD neutral."
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