Can the pound bounce back?

Sterling had a very poor end to the week, closing almost two cents lower against the dollar than it opened on Thursday morning and giving up a cent on the euro. The Bank of England’s decision to leave interest rates where they presently are caused the sharp drops as trader’s reversed their positions, having bought sterling on the assumption that the base rate would rise. Over the last two weeks, speculation had grown that a rise was nailed on for this meeting, with Governor Andrew Bailey and Huw Pill encouraging the view. In sharp contrast to the actions of the UK’s central bank, the US Federal Reserve lived up to the hints that it had been giving the market and announced a start to tapering its bond purchases. With the Fed tightening, the Bank of England vacillating, and the ECB still insisting that inflation is transitory, a clear path for dollar appreciation lies ahead.

This recriminations and fallout from the Bank of England’s decision, or lack of one, will continue to haunt sterling over the coming days and possibly as far ahead as its meeting in December. Also starting to gain more press headlines are the seemingly increasing difficulties between the UK government and the EU commission over the implementation of the Brexit agreement, with the triggering of Article 16 becoming an increasingly likely outcome. After the excitement of last week’s central bank meetings, the market will revert to the more mundane occupation of studying macroeconomic data. With the Fed moving to rein in money supply in an attempt to slow inflation, the release of October’s inflation data in the US will be the mood-setting event for the market.

GBP

As we said, earlier the Bank of England’s reticence to raise rates may continue to reverberate through the market in the coming days and act as a deterrent to investor demand for the pound. Sterling will continue to be troubled by the more aggressive anti-inflationary stance that the US Federal Reserve is taking and may continue to struggle against the greenback.

However, a rise in December is still on the cards, and with the ECB still dovish, its fall against the euro may be overdone. As we mentioned earlier, Brexit has crept back on both the political and market agenda, and with both sides playing hardball, the likelihood of an outcome that satisfies everyone is increasingly unlikely, and the chances of a trade war with Europe now looms.

Figure wise, the only day with top tier data out is Thursday, with the highlight being the third quarter Gross Domestic Product which is expected to show healthy growth of around 5.5% boosted by the return of schools. Industrial and Manufacturing Production is also scheduled for release.

EUR

The European Central Bank continues to insist that inflation is a transitory problem. Having seen the criticism of the Bank of England, it is quite likely to be smiling to itself for being non-committal on policy. During the week, Christine Lagarde continued her dovish rhetoric and the euro suffered against the dollar. It did, however, make good ground against sterling, as previously mentioned. The ECB are still far behind the Fed, and once the dust has settled over recent events, it is still lagging behind the Bank of England in the tightening stakes.

How long the ECB can maintain this tack with inflationary pressures increasing is uncertain, and of course, as prices rise, the hawks, primarily from Northern Europe, become stronger. This week we have a meeting of the European Finance ministers and the ZEW German and Eurozone Economic Sentiment survey’s tomorrow. This data is followed by German Consumer Prices for October, which is likely to be a sensitive number. The German Press is now openly critical of the ECB’s policy stance over inflation.

The week closes out with European Industrial Production on Friday. In case you’re missing central Bank action, the ECB’s Chief Economist Phillip Lane is speaking on Monday, Thursday and Friday whilst Fabio Panetta, Christine Lagarde, Elizabeth McCaul, and Isabel Schnabel take to the podium on Tuesday.

USD

King dollar is back! Demand for the greenback increased after the Federal Reserve not only delivered a tapering of $15bn a month as promised, and it looks set to increase after last Friday’s release of nonfarm payrolls came in better-than-expected. The report showed that 531,000 new jobs had been created in the previous month. Delving into the report, it becomes apparent that the US Labor Department had been understating the data for some months, and they had added a revision of 235,000 jobs for August and September. With such good employment data, the market’s thoughts are now turning towards the next step in the Fed’s move back towards normality.

This week we get a sighting on inflationary pressures starting with Producer Price Index tomorrow followed by Consumer Price Index the next day, which some are predicting to hit 5.8%, its highest level for over 30 years. The weekly jobless total will be published on Wednesday as the US is shut for the Veterans Day holiday on Thursday.

The week closes with the Michigan Consumer sentiment and Septembers JOLTS (job openings). Jerome Powell, Richard Clarida and Michelle Bowman speak this afternoon, and Jerome Powell takes to the podium again tomorrow.

Scandi

Despite the lack of major macro data releases from Sweden, the Swedish krona hit levels last seen in 2017 against the euro. This week we will get the latest Industrial Production figures alongside the Industrial Orders for October on Tuesday. The latter is expected to have contracted due to global supply issues and constraints.

Over in Norway, the Norwegian Krone weakened across the board after hitting a two year high against the euro and other G10 currencies. Today we will get the latest Industrial Production figures, and on Wednesday, the Inflation figures are released. On a year-on-year basis, the latter is expected to remain at 1.2%.