Sterling has once again been trading in wide ranges against the Euro (High 1.1441 versus Low 1.1080) and USD (High 1.3400 versus Low 1.3034) since the beginning of Q4.
The first UK interest rate rise in more than a decade was anticipated by markets and Sterling has been under pressure following mixed signals about the monetary policy outlook and domestic political uncertainties.
The minutes of the MPC meeting were interpreted as ‘dovish’, due to the omission of a key sentence, which previously stated: “Policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations”.
The ECB, meanwhile, announced a reduction in its monthly bond purchases to €30bn starting from January until at least September, but kept the programme open-ended for now; a move that was interpreted as ‘dovish’.
A political crisis in Germany is gathering steam with the ‘Jamaica’ coalition talks having fallen apart following a walkout by the FDP. After weeks of exploratory talks, the parties were not able to agree on the key issues of migration, tax and energy policy. Chancellor Merkel identified she would prefer to have a new election to ruling with a minority, however Germany's president told the parties they owed it to voters to try to form a government.
With the ongoing separatist crisis in Catalan/Spain, political unrest will feature heavily for our Eurozone friends in the coming month/s.
US economic data has been volatile as a result of the ongoing impact of hurricanes Harvey and Irma. Nonfarm payrolls rebounded by 261k in October, following the September slump, and the unemployment rate fell to 4.1%, however annual earnings growth remained subdued, slowing to 2.4%. The underlying picture is still that the US labour market is tightening and economic growth remains robust.
The Federal Reserve chose to leave interest rates unchanged at 1-1.25% on 1st November and still acknowledged some concerns about low inflation, but a December hike remains on the cards (maybe) at the Feds meeting on the 13th. President Trump’s announcement of Governor Jerome Powell as his pick for the next Fed Chair is seen as an indication of continuity in the current policy of gradual rate rises.
The divorce of the century keeps rumbling on and the majority of market participants continued to assess the risk of a Brexit ‘no deal’. In the near term, both sides in the Brexit talks still hope to make ‘sufficient progress on separation issues, including the divorce bill, in time for the December EU leaders’ summit.
To date there has been scant headway in negotiations and embattled Prime Minister Theresa faces a political balancing act as she tries to meet EU demands for more concrete pledges on Britain's exit bill without triggering a backlash from Brexit campaigners at home.
Positive progress in the divorce talks with the European Union has the potential to provide the biggest boost to Sterling in the coming month. On the flip side any negative headlines will be pounced upon and the Pound will get pounded……
So all in all expect a highly volatile December for Sterling, with Brexit as the main catalyst. Another market mover to watch is the Federal Reserve’s interest rate announcement on the Dec 13th with a hike all but priced in, so we could see a USD sell off if they decide to hold off.
Throw into the mix political tensions in Europe and the usual end of month, quarter and year positioning, and things will certainly be interesting.