EU leaders met yesterday in a summit which did not include the UK. EU president Donald Tusk, who led the meeting, covered key issues such as border control, migration, terrorism and, of course, Brexit. German Chancellor Angela Merkel also attended.
Mr Tusk said: “We haven’t come to Bratislava to comfort each other or even worse to deny the real challenges we face in this particular moment in the history of our community after the vote in the UK.” Now many traders believe political uncertainty must mean a weaker euro.
One would argue that in 2016 political uncertainty has led to risk aversion and this has benefitted the euro. One fact to consider is that the average forecast from September’s Reuters Poll shows currency strategists predicting a €1.1678 GBP/EUR rate by February 2017. They might just be right.
Sterling
The Bank of England made no changes to its 0.25 per cent bank rate as expected after concluding its monetary policy meeting on Thursday. But the guidance offered in the statement suggested that the November 3 meeting, the next ‘Super Thursday’, will be ‘live’ and that another rate cut is possible.
It’s been a very busy week of top tier UK economic releases and announcements which have caused some intra-day swings but no material move in Sterling. Next week’s US rate decision could offer some new direction with the GBP/USD rate currently holding above its post-Brexit average of $1.3150.
US dollar
Another disappointing set of US economic data reports this week not only caused a fall in the market-implied probability of a US rate hike on September 21, but also caused a fall in the chances of a US rate hike at all this year. Thursday’s US inflation data was another important release.
US retail sales fell by -0.3 per cent m/m in August according to Thursday’s data, much more than the -0.1per cent expected. While the monthly figure is volatile, it was well below the ‘roughly’ +0.2 per cent average we’ve seen over the past six months. US industrial output fell by -0.4 per cent in August.
According to CME data, traders now see a 12 per cent chance of a rate hike next week, and a 48 per cent chance of a hike by December – the latter is down from well over 50 per cent earlier this week. The range in GBP/USD over the past 30 trading days is 5.8 cents from $1.3445 down to $1.2863. Unless we get a surprise rate hike, the pound could continue to trade in the top end of this range for longer.