10th October 2018 Market Update
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?? GBP – Sterling made another strong start this morning hitting fresh four-month highs against the Euro, whilst also making solid gains against the Dollar. Unfortunately, no prizes for guessing the major cause for this as news coming out this morning claimed that further progress had been made in Brexit negotiations over the Irish border backstop. In addition, reports have also emerged that between 30 to 40 lawmakers from the Labour Party would be willing to back Theresa May’s Brexit deal which would increase the chances of a deal passing through the House of Commons. These chances may be increased further today as Theresa May will face the House for the first time since the EU rejected her Brexit plan; but this seems overly optimistic given the persistent pressure from Tory MP’s to amend her proposal. This includes former Brexit Secretary David Davis who has warned that the deal offers ‘none of the benefits of Brexit.’
Away from politics, important UK data out this morning largely missed expectations with manufacturing production contracting by 0.2% (vs. +0.1% exp) and GDP remaining flat (vs +0.1% exp). This has seen Sterling lose some of its early morning gains, but it still remains above its respective open against both the Dollar and the Euro.
?? USD – Whilst the Dollar has had a relatively slow start to the day, the fundamental support levels remain high for the greenback given the strength of the US economy and the likelihood of upcoming interest rate rises planned by the Federal Reserve. Indeed, the Fed has responded to increasing inflationary pressures with consistent tightening; this is despite the criticism of President Donald Trump for whom a weak Dollar is preferred due to its ability to potentially wipe out the US trade deficit.
Looking ahead today we have PPI figures out, with investors betting that rising inflationary pressures will keep the Fed’s tightening plans on track. Were the data to come out lower than expectations, we could see the Dollar weaken. This data is out just before the Treasury auction for both 3-Year and 10-Year Bonds for which yields have fallen slightly to 3.21% having reached a seven year high of 3.26% overnight, providing added support for the Dollar.
?? EUR – The remainder of the month promises to be a noisy one for Italy and therefore the Euro with a relatively busy calendar over the next few weeks. Firstly, the European Commission will review the draft Italian budget on the 15th October after which the Italian government would have three weeks to submit a reworked version if it is deemed unacceptable. In addition, the S&P and Moody’s are set to reassess Italy’s credit rating with the potential for a downgrade looking ever more likely. All of that being said, with tensions rising and escalatory rhetoric being spouted from both sides – a compromise on the issue remains the most likely outcome, with a probability of 65% according to the political risk consultancy Eurasia Group.
GBP: Sterling remains well-bid as persistent, positive Brexit news works to offset any weakness brought about by lower than expected data;
USD: Despite President Trump’s best efforts, the Dollar remains strong ahead of PPI inflation data out this week thanks to a strong US economy and the Fed’s proposed interest rate path;
EUR: Italian budgetary concerns promises volatile month for the Euro.
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