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UK Market Analysis
Politics Keeps Pressure on GBP

David Starkey November 16, 2017

Markets yawned as inflation, employment statistics, and retail sales failed to offer any meaningful surprises this week. As discussed in last week’s commentary, the market’s growing lack of interest in data could be a function of the Bank of England. Now that the anticipation/excitement of a BoE rate hike has passed, the focus of currency markets is elsewhere, like politics. Sterling action this week has been soggy, and the primary driver seems to be the fragile state of British politics. Headlines dominated with political scandal and alarm bells about deadlocked Brexit negotiations have kept a lid on GBP this week.

The charts show a fairly uninspiring performance by GBP in recent weeks. Since the Bank of England’s “dovish hike” early in the month, sterling has experienced a period of consolidation against currencies like CAD and USD. Meanwhile, against JPY, EUR, and CHF, its capitulation from early month highs has extended. It is notable that virtually the only currency the pound has outperformed in the last couple of weeks is the Australian dollar. Unfortunately, there’s very little on the domestic economic calendar in the week ahead, meaning a data-driven rebound is probably not in the cards for the British currency.

Rather, sterling’s hopes and prayers next week will hang on the possibility of fresh good news of a political nature. Those readers who have glanced at the front page of a newspaper in the last 18-months will appreciate that a headline which includes the words: Brexit, May, Boris, Davis, and/or Bernier is unlikely to have a positive impact on GBP these days. Even if the front page is only seen fleetingly and casually, while you’re thumbing to the sports or lifestyle section at the back.

Beyond the shores of the UK, there are a couple of events worth being aware of next week. The most likely source of rate volatility is Wednesday’s FOMC minutes. This week’s October American inflation and retail sales data both remained stable. That helped support the market’s view that Fed Chair Janet Yellen will sneak one last 2017 rate hike into the history books next month. Given the “priced-in” nature of a rate hike, it could be greenback’s game to lose in the week ahead.

On the topic of widely expected central bank action, December could see USD fall victim of “buy the rumour, sell the news” style trading activity. The situation playing out with Fed rate hike expectations closely mirrors ECB tapering in October and the BoE rate hike a couple of weeks ago. In both previous cases, despite what would otherwise be considered a hawkish policy change, euro and pound both came under substantial pressure. Should history repeat itself, USD could be in for a similar ride.

Note that next Thursday is the Thanksgiving bank holiday in the United States. While Friday isn’t technically a holiday, practically speaking, many people will be off work and local firms will be operating with a skeleton staff. The knock-on effect is that thin and choppy holiday style trading could characterize USD action from next Wednesday through the end of the week.

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