May threatens to extend Brexit transition period at EU summit

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18 October 2018

thomasdodds

Sterling fell by around half a percent against the US Dollar on Wednesday, weighed down by soft inflation data and a general resignation among investors that the UK and EU will fail to reach an agreement on Brexit at this week’s EU summit.

F
ocus in the currency markets was firmly on the commencement of the two-day EU summit yesterday, long been seen as the deadline for an agreement on Brexit to be stuck. Hopes for a deal are low, however, with the deadlock over the Irish border presenting itself as a major stumbling block. There has been talk over an emergency summit in November, although sufficient progress would need to be seen today in order to ensure that this meeting is given the greenlight.

The Pound received little support from Theresa May’s optimistic comments yesterday. Speaking ahead of the summit, May claimed that she believed a deal would still happen and that good progress had been made since last month’s Salzburg meeting. She later claimed that the UK could be seeking a longer transitional period post-Brexit in order to ensure the avoidance of a hard Irish border. Volatility in Sterling is likely to be heightened today, with the currency sensitive to any and all headlines out of the talks.

UK inflation eases to three month low

Earlier in the session, the latest UK inflation data showed that consumer price growth fell more than expected in September. Inflation eased back to just 2.4% last month, a fairly significant decline on the 2.7% from the previous month and a big disappointment on the 2.8% that economists pencilled in. Food prices provided the most significant drag, sending the measure to its lowest level in three months.

Despite the decline, headline inflation continues to remain well above target and we do not, at this stage, believe the downturn in any way derails our call for another interest rate hike from the Bank of England in the first half of next year.

US Dollar rallies on upbeat Federal Reserve minutes

With attention largely on Brexit, yesterday evening’s Fed minutes went mostly under the radar. The minutes were relatively hawkish, leading to a broadly stronger US Dollar. Policymakers, as anticipated, continued to talk up a strong US labour market and high inflation that would warrant gradual increases in the interest rate. The minutes also noted that all members of the committee were in support of a September rate hike and that almost all of the FOMC participants ‘considering it appropriate to remove reference in statement to monetary policy being accommodative’.

Meanwhile, the latest inflation numbers out of the Eurozone were a slight disappointment, albeit were largely overlooked by currency traders. The core inflation number, the key to ECB monetary policy, was unexpectedly left unchanged at a lowly 0.9% for September after investors had eyed a modest upward revision.