Market News & Insights
19 October 2017

There’s Summit about Brexit

This week had the makings for the pound to reverse some of its recent misfortunes. The two headline figures here were no doubt Tuesday’s inflation number and yesterday’s earnings figure. The CPI figure edged up from 2.9% to 3% to hit its highest level since 2012. Yesterday’s income figure however disappointed, and helped to highlight the constraint that UK consumers find themselves under. Up until now while we haven’t necessarily seen these figures feed through to the Retail Sales figure, it will be very important to keep a close watch on these, particularly with the lead up to Christmas. A few moments ago, the latest retails sales figures missed expectations by a wide mark, showing annualized growth for September only at 1.6% versus 2.2% expected.

No surprises the pound has been sold off in response and is continues to gain any momentum against its major peers, trading back below 1.32 against the US dollar, while looking to retest the .90 barrier against the euro. One of the major reasons for this lack of sterling momentum is of course, Brexit. The divorce talks will be on the head of agenda at the latest EU summit which starts today. Theresa May is expected to try and break the deadlock in talks, however that will be a very tall order seeing as David Davis and co have failed to agree on anything for the past 4 months. We don’t expect there to be too much noise around this event, as markets will be more wary about next week’s ECB monetary meeting.

Political risk will be front and centre in the Eurozone today with the Spanish-Catalan standoff coming to a head. Previously, Spanish PM Rajoy gave Catalan President Puigdemont until 10am to renounce his claims to independence. Anything less, and the central government will start the process of taking direct control of the regional administration. The Madrid government in the last few minutes have stated that they are now going to go through with that threat with Spain moving forward with the process of suspending the powers of the Catalan government. The effects of the crisis on the economy and markets are becoming more evident. Spanish stocks have underperformed their European peers this month, Catalonia-based companies have threatened to leave the region and Spain has lowered its economic growth forecasts. Wider European equity indices are also opening lower this morning with the German DAX down 0.27% and the French CAC 40 down 0.28% at time of writing.

Despite these significant developments and potential impact on the Eurozone, you would hardly notice this risk in euro movements over the past twenty four hours with the single currency moving higher against its main peers. EURGBP is higher again and has been steadily rising too and is trading close to .8965 this morning. Although it could be argued the move higher in EURGBP is more a sterling related move ever since BOE Governors’ comments on Tuesday stating that inflation is likely to have peaked at 3% combined with the earlier release of the weak Retail Sales figure. An actual move higher by the euro is best seen in the EURUSD currency pair and that too is rising. Overnight we saw it breach light resistance at 1.1790, hitting highs of 1.1821. As noted yesterday, rallies higher are likely to run into more sellers around the 1.1850/70 area. We are likely to see EURUSD trading within the recent tight range of 1.17-1.19 ahead of next week’s ECB meeting.