Pound edges higher as May claims Brexit deal ‘still achievable’

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16 October 2018

thomasdodds

Sterling edged tentatively higher against the US Dollar on Monday, with some optimistic comments from UK Prime Minister Theresa May raising hopes that a deal on Brexit could be struck at this week’s crucial EU summit.

I
nvestors were once again fretting that a deal would fail to be reached following the news that key Brexit issues remained after talks between EU chief negotiator Michel Barnier and Brexit minister Dominic Raab over the weekend. May, however, insisted during a commons address that a Brexit deal was ‘still achievable’ and that the critical issue over the Irish border would not derail the chances of a deal being reached.

We think the Pound is likely to remain volatile leading up to Wednesday’s two-day summit in Brussels, as investors await headlines on the state of discussions. With key issues still unresolved so late in the day, it is now looking increasingly likely that an emergency summit in November may be required in order to iron out the remaining details of the agreement.

Soft US retail sales drag Dollar lower

The US Dollar lost ground against its peers on Monday, dragged lower by yesterday’s soft retail sales figures. Sales were almost static in September, rising by just 0.1% on a month previous, well below the 0.5% that economists had penciled in. This suggests that overall activity in the US economy in the third quarter of the year may not have been as stellar as much of the market anticipated.

The 10 year US government bond yield also eased back in the past few sessions, which contributed to much of the recent drop off in the greenback. The benchmark interest rate surged to its highest level in seven years last week on expectations of a faster pace of interest rate hikes from the Federal Reserve. The key rate has, however, fallen back below 3.2%, albeit still remains very high by recent standards.

Trading in the US this week will likely be driven largely by the release of this Wednesday’s Federal Reserve meeting minutes. We expect more of the same from the FOMC, with the minutes to highlight growing confidence over the inflation outlook and strong labour market, while pointing to another interest rate hike in December.

Euro to take cue from Brexit, inflation data

A relatively soft performance of the US Dollar allowed the Euro to eke out some gains yesterday, briefly rallying back above the 1.16 mark. Yet, with domestic economic news scarce these gains were relatively modest in nature.

With news out of Brexit likely to dominate trading in both the UK and the Eurozone, economic data releases will probably take more of a backseat. That being said, this Wednesday’s Euro-area inflation numbers could take on some importance, given its bearing on European Central Bank monetary policy. The headline rate is expected to remain unrevised, although economists’ have penciled in a modest upward revision in the core CPI number to 1.0% from 0.9%.