3rd October 2018 Market Update
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?? GBP – As Brexit negotiations continue to rumble on, we still see positive headlines providing short term support for the pound, with longer term concerns as to whether the House of Commons will support any deal agreed with the E.U. helping to keep rates in check. As such, news over the weekend that PM Theresa May will make concessions on the Irish border backstop provided some sterling relief. However, this was undermined yesterday by markets perceiving an elevated lack of unity within the majority Conservative Party as a speech by Boris Johnson which once again laid into the Chequers Plan was greeted with cheers by the large crowd. This, combined with Construction PMI data which dropped to a six-month low yesterday, caused the pound to hit a three-week low against the dollar. Focus will now turn towards today’s Services PMI report, as well as continued headlines coming out of the Conservative Party Conference with PM May hoping to heal divisions within her party whilst also gaining support for her proposed Brexit plan.
?? EUR – The euro has regained some of the spotlight as concerns over Italy’s mounting debt begin to weigh heavy. This is after Pierre Moscovici, the E.U’s Commissioner for Economic and Financial Affairs – declared Italy’s plan for a deficit of 2.4% as a ‘very, very significant’ deviation from previous commitments. Similarly, as per E.U fiscal rules – a country’s debt should be less than 60% of the size of its economy – Italy’s debt currently stands at one third bigger, hence the increasing concern around both Italian debt, and its impact on the euro. These fears were exacerbated yesterday when Claudio Borghi, the head of the lower house budget committee claimed that Italy would solve its fiscal problems if it had its own currency; this naturally sent euro alarm bells ringing – causing it to fall to a six-week low against the dollar. In response Prime Minister Giuseppe Conte declared the euro as “unrenounceable” which helped it regain the majority of its losses on the day.
?? USD –The dollar has continued its story of strength over the last week following the Federal Reserve’s decision to increase interest rates, as well as its forward guidance indicating another rate hike in December, three more next year and one in 2020. This view was reiterated as part of a speech from Fed Chairman Jerome Powell who explained that he expected the Fed to continue ‘slow, gradual IR hikes’ as part of a ‘remarkably positive outlook’ in the U.S. With more data out today, we will get a better impression of whether the economy is performing as well as the Fed’s outlook.
GBP: Sterling weakens following Boris’ speech which urged the Conservative Party to ‘Chuck Chequers’ as fears towards a lack of support for May’s Brexit deal increase; PM set to speak today at Conservative Party Conference.
EUR: The euro has taken back some of the spotlight following the increased focus on the issues of Italian debt; volatility caused by statements coming from government officials.
USD: Dollar remains strong following last week’s interest rate increase, with forward guidance indicating that the Fed has no intention of stopping there.
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