Rising hopes for a Brexit deal buoy Sterling as risk assets rally

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5 November 2018


Global equities and credit instruments rallied hard last week. The rise in investor sentiment was capped on Friday by indications that a trade deal between China and the US was not far off.

urrency markets reacted by sending the US Dollar down against all other G10 currencies, except for the traditional risk havens: the Japanese Yen and the Swiss Franc. Emerging market currencies had a more mixed performance. The drop in oil prices dragged down some oil-driven currencies like the Russian Ruble and the Mexican Peso, but most Asian currencies posted sharp gains.

The midterm elections in the US on Tuesday loom large for this week. Read our special report here. The most likely scenario is the Democrats retaking the House while the GOP retains control of the Senate. In the event that the Republicans maintain both chambers, the US Dollar is likely to rally on expectations of further tax cuts. By contrast, should the Democrats capture the Senate as well as the House, we are likely to see some Dollar weakness on the expectation of legislative paralysis and likely congressional investigations on allegations of White House illegalities.

Major currencies in detail


Sterling experienced one of its best weeks in months off the back of more hawkish than expected Bank of England commentary and rumours of a breakthrough in Brexit negotiations. While the MPC left rates unchanged last week, as was universally expected, it made it clear that it considers the current slowdown as temporary. As for Brexit, newspaper reports that the EU was willing to make some concessions allowing for at least temporary UK access to the common market in goods buoyed the Pound.

No key data releases are scheduled this week, aside from Friday’s GDP numbers, so the main risk event for Sterling will be the US midterms and any confirmation or denials of the aforementioned newspaper reports on Brexit.


The Euro ended the week more or less where it started, pulled in opposite directions by weak third-quarter growth data and a rebound in core inflation that was mostly in line with economists expectations. A very quiet calendar this week means that the common currency is likely to trade mostly off news elsewhere, in particular the US midterms.


An easing back in third quarter GDP growth and a weakish durable goods report were overshadowed by a quite strong labour market report out of the US.

In addition to good news on the headline jobs number and labour force participation, we finally saw hourly wages rising above 3%. This is exactly the kind of report that the Federal Reserve wanted to see. Although they will not be hiking rates at their November meeting on Thursday, this data will give the FOMC the green light to proceed with another hike in December and further gradual rate increases into next year.