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UK Weekly Market Analysis
Dovish Discord Dampens the Dollar

David Starkey October 12, 2017

 – Fed minutes strike cautious tone

 – Currencies on American inflation watch tomorrow

 – GBP gets direction from data in week ahead


The event to watch this week has been the minutes from the most recent Federal Reserve meeting, released on Wednesday night. Whilst most analysts are expecting a further rate rise in December, there was a slightly more cautious tone from policymakers, suggesting that some of their contingent were not entirely sold on the idea of a third hike of 2017.

The minutes stated that “many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.”  Following the release, the dollar weakened slightly against both sterling and the euro. The dollar could be highly reactive to future statements and speeches from Fed officials, as observers try to identify and count the voting members in each camp.

Before the weekend, the big dollar will once again hold the collective attention of currency markets. Tomorrow sees the release of both inflation and retail sales data in the United States. The August CPI reading of +0.4% from the previous month was the strongest number in six months. Should tomorrow’s result prove similarly encouraging, it could embolden the Fed and pave the way for higher interest rates. As it stands, a hike by year end is about 75% priced in. A rise in expectations could be a source of USD strength.

Last month American retail sales surprised markets, contracting by 0.2% month-over-month. Tomorrow some kind of rebound in the vicinity of a 1.5% month-over-month expansion is expected. However, like last week’s employment data, results are susceptible to hurricane-related distortions. As such, currencies could look past the headline result and scrutinize driving factors more heavily.

Looking ahead to next week, sterling will be back in the limelight thanks to a myriad of economic data releases. Employment statistics, inflation, and retail sales will keep sterling traders on their toes Tuesday, Wednesday, and Thursday respectively. Due to the recent spike in inflation to near 3%, the Bank of England has begun warning about an interest rate hike. On the back of this guidance, markets have more than a 90% chance of a hike by the end of the year priced in.

However, given Brexit and the precarious state of the UK economy, nothing is written in stone. The BoE has repeatedly intimated it would prefer to stay on the sidelines and is begrudgingly considering tighter monetary policy. Thus evidence the economy is robust enough to support such a move and that inflation will continue to trend above tolerances is necessary. Should data next week fall short, especially inflation, BoE Governor Mark Carney and his team could back away the idea of a rate hike.

Interestingly, with a rate hike virtually priced in, it could be sterling’s game to lose next week. Strong data would only go to confirm what currency markets have already prepared for.  Disappointment could soften expectations and trigger fresh weakness in GBP. Off of charts in the last couple of weeks, the British pound has pulled-back a couple of percent from highs achieved during the September rally. This turns areas like the 1.3600 for GBPUSD and 1.1450 for GBPEUR into resistance levels. Going forward, sterling buyers and sellers would be wise to take these areas into consideration.

David Starkey

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