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October 2017

Sterling up on Bank of England talk

Published: Monday 16 October 2017

  • Sterling up on Bank of England talk
  • Euro weakened by EU politics
  • USD weaker on oil rise over Iran tension
By David Johnson
The European Union was all over the news over the weekend. The Austrian general election appears to have delivered a Eurosceptic leader, who will most likely form a coalition with a right wing party that will be a nightmare for the EU. Add a speech by the Hungarian Prime Minister, Viktor Orban, which laughed at the idea of a European nation and derided the state of the Union under the stewardship of Tusk and Juncker and the notion of closer integration seems far from the mark. The Euro weakened in early far eastern trade.  After peaking at just shy of $1.21 five weeks ago, the Euro – USD rate fell, but failed to recover above $1.19 and is falling today.  Other than inflation and some business sentiment indices, this is a quiet week for Eurozone data, so central bankers and politicians will drive change.
Sterling starts the week a little stronger after Bank of England (BoE) Governor, Mark Carney, had a rush of blood to the head and actually said something that supported the Pound. Who would have thought it! Carney commented that, with more people in employment than ever before in the UK and Brexit fast approaching, the BoE is likely to be less tolerant of ‘over-target’ inflation. An interest rate rise in the near future may be ‘appropriate’. That’s not exactly a stirring call to arms, but it is a change of emphasis for the Governor and traders like the idea of better yields on UK investments. We will get UK employment and average wages data this week, as well as consumer inflation. The gap between inflation and wage growth seems to be the key to the BoE’s thinking, so we will watch with interest. The forecasters believe UK inflation will hit a five-year high, but wages are unlikely to follow suit. That may delay Mr Carney’s plans. The Brexit negotiations continue in the background… as always.
Upbeat Chinese inflation numbers were largely ignored, but a ramping up of tension over the US President’s stance on Iran has caught the markets’ attention. Oil prices are up; hence the USD is weaker (although not against the Euro) ahead of this afternoon’s US Empire State Manufacturing Index. That is forecast to be rather downbeat, so further USD weakness may be coming our way. All of that is in spite of a very upbeat speech by Federal Reserve Chair Janet Yellen over the weekend.  
Overnight tonight we will get New Zealand inflation data and that is expected to show a significant rebound after last month’s unchanged result. The Sterling – New Zealand Dollar rate has pushed upward throughout August and September but is now trapped below NZ$1.87. A break above there would be very significant and could pre-empt more gains. However, if this inflation report is as strong as forecast, another dip is more likely, with NZ$1.83 as the initial target.
And lastly, with the beautifully named but terrifying Ophelia bearing down on Ireland, Wales, Scotland and the North of England, we are thinking of everyone in the areas affected. Please stay safe.
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Today's major economic releases

Market BST Data/Event Previous Expected
EUR 10:00 EU: Trade Balance 18.6b 20.05b
CAD 13:30 Canada: Foreign Securities Purchases 23.95b 20.05b
USD 13:30 US: Empire State Manufacturing Index 24.4 20.3
CAD 15:30 Bank of Canada Business Outlook Survey    
NZD 22:45 New Zealand: Consumer Price Index 0.0% 0.4%

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