EURGBP broke the 0.90 level

Market movers today

  • Key market movers today will be CPI inflation and retail sales in the US. We estimate CPI core increased 0.2% m/m (1.8% y/y against 1.7% y/y in August ), which is a bit more than the trend seen over the past half year. We expect headline CPI to come out at 0.6% m/m (2.3% y/y against 1.9% y/y in August ) driven by a sharp rise in gasoline prices related to the hurricanes Harvey and Irma. If our estimates turn out right , then both CPI and CPI core will be close to/above the 2% target , but note that the Fed targets PCE inflation (still significantly below target ) and hence it is still struggling with low inflation.

  • With respect to the US retail sales cont rol group, we expect to see some reversal of the August decline of 0.2% m/m and look for a rise of 0.4% m/m. We also have US consumer sent iment from University of Michigan (preliminary) and a couple of Fed speeches by Evans (voter, dovish) and Kaplan (voter, dovish).

  • Note that a speech on monetary policy by Fed chair candidate Jerome H. Powell scheduled for today has been cancelled.

  • In Europe focus continues to be on the situation in Catalonia and Brexit negotiations.


Selected market news

Like the rest of the week, markets have been calm overnight. US stocks closed lower but Asian equities are up this morning and US S&P 500 futures are trading flat . EUR/USD is slightly higher, perhaps on the ongoing discussions on US tax reform, which show that tax reform is easier said than done, in line with what we had argued for. Brent crude oil is up to USD56.55/barrel after report showing US stockpiles fell.

Yesterday, US Treasury secretary Mnuchin said that he expects Trump to nominate a new Fed chair "next m onth". Kevin Warsh (previous Fed governor 2007-2011) and current Fed governor Jerome Powell are the two top candidate but John B. Taylor (professor at Stanford University) is also in play. Chief of St aff John Kelly says an announcement is " some t ime away".

Yesterday, EUR/GBP broke the 0.90 level yesterday (the highest in a month) after the joint Brexit press conference by EU chief negotiator Michel Barnier and UK Brexit Secretary David Davis, where Barnier said there have not been "sufficient progress" in the negotiations to move from phase 1 (divorce bill, Irish border and cit izens' right s) t o phase 2 (future relat ionship) when the EU leaders meet next month. Barnier is still optimistic about reaching an agreement before the EU summit in December but further negotiation rounds are needed. Still we were caught by surprise by the negative market reaction, as we think the comments were in line with what most had expected. The reaction was possibly fuelled by a somewhat misleading Bloomberg headline suggesting that Barnier said that Brexit talks had reached a " deadlock", which, however, was only about the divorce bill. As we have mentioned previously, we think the biggest obstacle for the negotiations is the divorce bill, as it is difficult for the UK to agree on a divorce bill before knowing the future relationship. Yesterday afternoon EUR/GBP fell back again and is trading at 0.892 currently after a story that EU might tell Barnier to begin preparing for discussions on a transitional deal (behind closed doors).

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