Market News & Insights
29 September 2017

Month End Flows to watch 

The euro was slightly bid yesterday, helped by better than expected confidence data yesterday morning and perhaps some euro buying to cover the selling we’ve seen in the single currency throughout September, ahead of next Thursday’s all important ECB meeting. We have continued to point out that ECB members appear to be trying to soften market expectations for tapering, however should markets be disappointed with the size of the taper then the euro will almost certainly face additional selling later next week.

The USD was weaker on the day despite better than expected GDP data which showed annualised GDP print 3.1% vs 3% previously guided for Q2. GBP was generally weaker on the day as well, giving back a small bit with EURGBP rising back above .8800 this morning, while GBPUSD dropped below 1.3350 before recovering into the afternoon and again this morning, back above 1.3400 for now. The general risk environment has been supportive of risk into the month end, we saw fresh highs posted across several of the major US indices as markets absorb some details of Trump’s tax plan. Month and third quarter end today so we expect to see some rebalancing flows which may knock recent trend development.

Mark Carney has been across the wires once again this morning and he continues to talk up the possibility of a rate hike in the coming month. There is no doubt inflation readings warrant rising rates but given the levels of debt, weakening wage growth and generally stagnating figures we are seeing from the UK it would be a surprising move. That being said, we cannot simply ignore the BOE Governor but understanding why he’s talking this way, especially with Brexit uncertainty still a real concern. Carney may raise rates in coming months however if he does it could well just be a token gesture, talking up rate hikes and the pound considerably benefits Carney. GBPUSD is now 12% above 2017 lows, with GBP broadly stronger across the board we would expect to see a slowdown in rising inflation, without the BOE actually having to commit to action. We’ve seen the ECB act this way in the past, verbal easing we called it then, while the BOE Governor is favoring verbal tightening. The final reading of Q2 GDP crosses the wires for the UK and expected to confirm growth at 1.7% year on year. Consumer credit and business investment data also cross the wires from the UK this morning.

Focus for the euro will be very much on next week’s ECB meeting but up first today we have CPI inflation for the region, which may well drive some pre-positioning for next week’s big event. The headline figure is expected to rise to 1.6% from 1.5% with the core reading sitting and holding at 1.2%. The euro has faced some selling through September and the ECB have certainly been sounding somewhat cautious however month end flow models would suggest some light euro buying throughout the day so do not be too surprised to see the euro stronger into 4.00pm.

In the US we’ll be looking towards inflation data as well with the PCE reading due, this is the FOMC’s favoured benchmark and a slight rise to 1.5% from 1.4% is expected. Given recent Fed rhetoric, continuing to favour one more rate hike this year, any firming inflation data can only help the outlook for the greenback. That being said today may not be that day, again month end models suggest USD selling for rebalancing, but s stronger PCE reading and the USD will have plenty of scope to rally tomorrow.