7th November 2018 Market Update
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🇺🇸 USD – Yesterday’s midterms came out largely as expected with the Democrats taking the House by 219 to 193 seats (a smaller margin than expected), while the Republicans took the Senate winning 51 seats to the Democrats 45. In terms of Dollar impact – this news acted to weaken the Dollar slightly as the likelihood of loose Republican fiscal policies such as President Trump’s latest proposed tax cut will likely be blocked by the Democrat majority in the House going forward. Longer term this means that the ongoing Dollar strength story could be curtailed as we move into 2019. More generally, the results will likely bring about a greater amount of political uncertainty domestically, which might embolden President Trump to turn his attention to foreign policy as a means of securing his legacy; this is likely to increase risk sentiment. Looking ahead this week, tomorrow sees the latest FOMC meeting take place where the market will be looking for any confirmation of plans to push its policy rate above 3% next year. Following that, attention will turn to the prospect of a US-China trade deal at the end of November.
🇬🇧 GBP – Yesterday was fairly volatile for Sterling as it swung about on the smallest of headlines and tweets, ending the day at a one month high against the Dollar. An example of this headline-driven volatility can be seen from Dominic Raab who was quoted to have said “Thumb’s Up” on his way out of a weekly cabinet meeting, which helped Sterling hit a five-month high against the Euro. It surely is a testament of the times that two words, with little to no context from our Foreign Secretary, has the ability to send Sterling soaring. If nothing else, yesterday’s events indicate that the overall sentiment towards Sterling is largely positive as it appears markets believe that a deal may be on the cards. This is also evidenced by bad news having less impact on Sterling than we would expect; for example, a senior member of the DUP said it looked like Britain would exit the EU without a deal as the DUP have vowed to scupper any deal that would treat Northern Ireland differently to the rest of the UK. In addition, yesterday’s data also indicated that growth in the UK services sector fell to a seven month low in October; but again the data isn’t doing much as Brexit optimism continues to dictate the Pound’s movements.
🇪🇺 EUR – Today we have seen a modest pickup in German Industrial Production but the Euro continues to be weighed down by Italian politics and weak PMI figures. In addition, the European Commission has been said to be looking at measures to enact sanctions on Italy following their reticence to alter their budget. Separately – while we don’t talk about it much, the Euro and European currencies, in general, could also stand to benefit from the increasing Brexit optimism, with this week again being labelled ‘make or break.’ Based on precedent, there is every chance that these Brexit headlines are more smoke than fire – but if we do see the removal of a hard-Brexit risk premium, both Sterling and the euro could see some benefit.
USD: The US Midterms came out largely as expected as President Trump’s Republican party lose control of the House but tighten their grip on the Senate;
GBP: Sterling remains volatile on the back of Brexit headlines, as it hits highs against both the Dollar and Sterling;
EUR: The Italy vs EC stand-off goes on, as talks of sanctions are now on the table.
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