Post date: 19/11/2018 09:00

Sterling ended a week of extreme volatility sinking against every major currency worldwide. Hopes ran high early in the week as rumours swirl that a draft deal with the EU was imminent. However, once the deal was made public the furious reaction on the part of the Eurosceptic wing of the Tory party left May’s premiership in doubt and markets reacted sharply. While overshadowed by the Brexit debacle, the US dollar also had a rough week, as US Treasury rates pulled back sharply after disappointing economic news.

No major news are on tap for next week, and markets will be thin ahead of the US Thanksgiving holiday. Expect exaggerated reactions to political headlines from the UK as Theresa May tries to defend her draft deal and her political future.


Economic news were again completely overshadowed by significant news on Brexit. Optimism about the draft deal reached with the EU dissolved later in the week as several ministers resigned from May’s cabinet in protest over the draft. As this is written, May’s Tory opponents do not yet have enough signatures to force a vote of confidence, and Sterling has stabilised somewhat in currency markets as a result. The immediate focus will be on whether opponents of the deal can gather the 48 signatures required to force the vote. So far the number is about half of that, although some additional MPs are rumoured to have signed in secret.


Brexit news stole the political spotlight last week, but the standoff over the Italian budget continues to provide headwind for the common currency. Neither Rome nor the European commission have budged from their respective positions. The standoff initially brought EUR/USD to its lows of the year last week. However, falling US yields damaged dollar sentiment globally and enabled the common currency to post a modest gain for the week.

The next chapter in the Italian budget saga arrives this Wednesday, as the European Commission decided whether to recommend an opening of an Excessive Deficit Procedure against Rome. However, we should note the process is slow and drawn out and it is unlikely that it will provide many market moving headlines, so the Euro will probably trade mostly off the events elsewhere, primarily the UK.


Key inflation data disappointed expectations again in the US. Core consumer inflation, which excludes volatile food and energy components pulled back slightly to 2.1% for the year. In the absence of any worrisome sign of an uptrend in inflation, we think that the statements by Philadelphia Fed President Patrick Harker, who told The Wall Street Journal that he is unsure of whether to support a December increase in interest rates. While we still expect that hike to happen, we think the recent pullback in market expectations for 2019 hikes is justified and remain sceptical of further dollar strength from here.