Sterling recovers on hopes of Brexit transition offer

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13 October 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling suffered from a remarkable day of currency trading on Thursday. The currency slumped by over half a percent against a broadly stronger US Dollar during morning trading before rallying sharply yesterday afternoon and this morning on hopes that Britain could be offered a two year transitory Brexit deal.

nother relatively damning assessment of the current state of Britain’s EU exit negotiations sent the Pound crashing to a three day low just after 10:00 yesterday. The EU’s chief negotiator Michel Barnier ramped up political risk for the currency by claiming talks had reached an impasse and there was not enough progress to move to the next stage of discussions. There remains a deadlock over how much the UK will have to pay when it leaves the European Union which Barnier claimed was ‘disturbing’, while suggesting that no progress had been made in talks this week.

However, Sterling was back on the front foot again this morning, surging to a ten day high after reports in Germany suggested that the EU is close to offering the UK a two year transitory deal. With no economic data release on the docket in the UK today, investors will turn their attention to this afternoon’s inflation release in the US.

US inflation, retail sales data key for Fed policy

The US Dollar was broadly stronger on Thursday ahead of what bodes to be a particularly busy session today with a number of high profile economic data releases likely to shift the greenback.

The latest inflation news will be of particular importance to the Federal Reserve as it edges towards a third interest rate hike in the calendar year. Consensus for the headline number is for an acceleration to an above forecast 2.3%, which would mark its highest level in six months. We think anything north of the 2% level would be more than enough to convince policymakers in the US still on the fence the need for higher rates. Retail sales figures, also at 13:30 UK time, will be worth watching.

Prior to today’s inflation release, we had some slightly dovish comments from Federal Reserve member Bullard on Thursday. Bullard voiced concern that raising rates too quickly could impact the central bank’s ability to hit its inflation target. Meanwhile, the latest jobless claims and producer price data was impressive, the former of which suggesting that the US labour market was back on track following a blip in the immediate aftermath of both hurricane Harvey and Irma. Claims for last week declined to 243k, having spiked to a two year high 298k at the beginning of September.

Euro receives little assistance from Draghi speech

A speech from President of the ECB Mario Draghi yesterday didn’t have the impact on the Euro that many onlookers had anticipated. Draghi touched on the success of the central bank’s negative interest rate policy, while reiterating the bank’s latest guidance on rates and the QE programme. His comment on the lack of progress on wages was enough to temper gains for the common currency which ended trading lower versus both the Dollar and Sterling.