More Losses in Store for GBP?

It should be no surprise to our readers that sterling is on the move. Between potential Brexit headlines, speeches from Bank of England officials and a number of key economic reports, we knew this would be an active week for sterling. Unfortunately neither BoE speak or UK data provided much support for the pound today.  Although BoE Governor Carney said a hike may be appropriate in the coming months, he also suggested that inflation may peak around 3% in October and indicated that firms have become less confident about a smooth Brexit. BoE members Tenreyro and Ramsden also sounded less enthusiastic with both members talking about slack, spare capacity and inflation peaking. However Tenreyro, who is a brand new member of the policy committee added that a hike would be appropriate if the economy performs as expected. As for data, consumer price growth was right in line with expectations. CPI grew by 0.3% in the month of September, which was slower than the previous month but year over year growth accelerated to 3% from 2.9% while core price growth held steady at 2.7%. Labor market numbers are due for release on Wednesday followed by retail sales on Thursday. According to the PMIs job growth weakened slightly last month and if that deterioration is reflected in the jobless claims AND average weekly earnings growth slows, GBP/USD could break 1.31.

The U.S. dollar ended the day higher against all of the major currencies but this weakness masks underlying pressures as the greenback eased off its highs by the end of the North American trading sessions. This intraday reversal tracked the move in 10 year Treasury yields which went from up 2bp to down -0.5bp. U.S. data was slightly better than the previous month with import and export prices rising, industrial production rebounding and the NAHB home builders index ticking upwards.  In response, USD/JPY spiked to a high of 112.48.  While these reports are encouraging, the next rate hike is still 2 months away.  Between now and then, the uncertainty of North Korea and Fed chair selection should keep the greenback under pressure. President Trump is expected to announce his selection of Fed Chair after a meeting with Janet Yellen some time this week. The odds that she will keep her job are slim. Fed Presidents Powell and Warsh along with Stanford economist Taylor are the top contenders. Powell who favors gradual rate hikes will be more negative for the U.S. dollar than Taylor and Warsh who have criticized the central bank's easy monetary policies.  If Yellen somehow manages to stay in her post, the dollar will rally wildly. Housing starts and building permits are scheduled for release tomorrow along with the Fed's Beige Book report. 

Euro traded lower against the U.S. dollar for the fourth consecutive trading day extending its losses below 1.1750. However even with today's decline, the total losses over this period was just over 100 pips which is not a big move.  Although Eurozone consumer prices ticked up by 0.4% in the month of September, investor confidence plunged in October.  This is expected considering Spain's political troubles and the uptick in the expectations component of the German ZEW survey confirms that the concerns are regional. The main focus for euro tomorrow will be ECB President Draghi's speech in Frankfurt. He's not the only policymaker speaking - Praet and Coeure will also be taking part in the same conference.  We are not sure how much monetary policy talk there will be as the topic will be "structural reforms in the euro area" but regardless the early European session speech could dictate how EUR/USD trades for the rest of the day.

All 3 of the commodity currencies ended the day lower against the greenback but these losses masks an impressive intraday recovery in USD/CAD.  Having come within 10 pips of 1.26, USD/CAD u-turned during the North American session to end the day much closer to 1.25. No Canadian economic reports were released today and oil prices gave up earlier gains but investors saw the reports that NAFTA talks will extend past year end as positive for the currency. A delay isn't great news but it means that talks haven't been scrapped. However between OPEC reaching a "general agreement" on an extension of the output cuts and Canada implementing more stringent borrowing rules, the Canadian economy and the Canadian dollar still faces downside risks. The New Zealand dollar shrugged off stronger consumer price growth to trade lower on the back of a 1% drop in dairy prices.  The RBA minutes did not have a significant impact on the Australian dollar although the central bank sounded upbeat, saying that growth will rise gradually thanks to current policy with a stronger labor market expected to support household spending in the period ahead.