The pound charges!
The pound led a furious charge yesterday, gaining almost 1% against the euro and dollar - the strongest one day rise since September. On the other side of the pond the US also released CPI figures, which too showed a rise to their strongest level in 2 years. But the increase came from energy price rises. These figures do little to alter the market expectation for a December rate hike.
The far more interesting news comes as the Presidential race heats up. President Barack Obama told Donald Trump to “stop whining” and to “try and make his case to get votes” after claims of possible voter fraud. Tonight we see the final TV debate between Hilary Clinton and Donald Trump before 8th November voting date.
In Europe it was fairly quiet in Euroland yesterday, with euro movements taking a back seat to developments elsewhere in the world. All eyes are on tomorrows ECB rate decision and press conference. The central bank is not expected to raise rates, so tone of Mario Draghi’s press conference will be closely watched. There have been a lot of contradictory headlines and speculation over the last couple of weeks regarding whether the central bank are considering reducing or extending stimulus.
Inflation at strongest level for almost two years
Firstly, we saw slightly stronger than expected inflation figures. Although usually an important figure, it was likely to take a back seat to Brexit headlines. Both MoM and YoY CPI came in at 0.2% vs 0.1% and 1.0% and 0.9% respectively, its highest level in almost two years.
Although a weaker currency and signs of an increase in prices in other key indicators, the Office for National Statistics said numbers did not yet fully reflect the impact of the falling pound. To say there was a short bounce is an understatement. GBPUSD and GBPEUR rose and fell 30pips after the release, in the same number of milliseconds.
Will a pickup in inflation lead to a rate rise? Anyone would be forgiven for expecting a rise in inflation would naturally lead to a rise in interest rates, however, the plan is in fact for the reverse. The economy is beginning to struggle, the BOE Monetary Policy Committee have cut rates once, are talking about cutting rates again by the end of the year and potentially increasing other forms of stimulus. In previous speeches, including those pre-Brexit, Mark Carney noted that in the case of Brexit, inflation would likely increase sharply, however the long term aim of the BOE MPC is to stabilise the economy. Regardless, it will be interesting to see how these latest inflation figures feed in to upcoming speeches.
Hard or soft Brexit?
But the main catalyst for the movement came from the High Court battle regarding parliament’s involvement with invoking Article 50. Sterling’s decline has been constant for the last two weeks, ever since Theresa May indicated the exit from the European Union would be a ‘hard Brexit’, severing ties to the single market place.
However, yesterday marked the end of a 3 day hearing at the High Court discussing whether Theresa May could trigger the exit on her own. If the Judge sides with the MPs, it could tip the odds in favour of a soft exit, where the exit only progresses if negotiations are favourable.
It is well known that the majority of MPs voted in favour of Remain, however most have said that they will honour the wish of the people. Yesterday’s drive higher came as comments from James Eadie were released - a lawyer representing the UK Government who suggested that it was “very likely” that MP’s would be able to vote and ratify a deal before Brexit can happen. Judgement is to be given as quickly as possible, the judge says. Whatever the result, expect the other party to appeal.