WEEK 44 WRAP – Forex Market Analysis: Mon 31st Oct to Fri 4th Nov 2016

Analysis written BY retail traders FOR retail traders

A fiery week leading up to fireworks night!


In a week that was billed as “Central Bank Week” with a huge amount of news being released, all eyes were on the Federal Reserve interest rate decision, and more importantly, the subsequent rhetoric. However, it was sterling which stole the limelight but not due to super Thursday as it was nicknamed, but the courts! On Thursday the High Court in the UK held in favour that the UK government must have a parliamentary vote prior to instigating article 50, which part one of the process by which the UK leaves the European Union. Subsequently, and over the course of the next 24 hours, the GBP gained over 300 pips against the USD driven by optimism in the market that the nature of the Brexit deal may be less “hard Brexit” as previously mooted by PM Theresa May and more conciliatory around key topics such as access to the single market. This came as somewhat of a shock to the market following a ruling the previous week relating to the Irish government which went in favour of the UK government, but this still has some way to go. The UK government has already indicated that it intends to appeal the decision and Theresa May continues to remain firm in her stance that this will not affect the government plans.

From a market perspective the issue with this is that it is likely to create even more uncertainty for even longer. The market would like the UK to keep close ties with the EU and yet it is viewed that British people voted for a complete exit, which includes leaving the single market and halting the free movement of people, with immigration being a significant driver behind the decision.

In other news for the UK both construction and services PMI significantly beat expectations as the economy continues to buck the trend and the doomsayers around Brexit. The GBP was further buoyed following Thursday’s Bank of England interest rate decision and subsequent monetary policy committee statement confirming that there would be no changes in the current QE programme with unanimous support from the committee. The committee stated that the outlook for activity is stronger than expected with household spending increasing more than originally planned. Inflation and GDP predictions were also revised upwards primarily due to the recent drop in sterling. With these revisions, a unanimous decision on monetary policy and continuing positive data readings from the UK it is felt that any further interest rate cuts are unlikely unless the economic picture changes significantly.


The other big news of the week was the FOMC policy meeting and interest rate decision, which as expected remained unchanged. It was a very balanced committee meeting which stated that the case for an increase was continuing to strengthen but they wanted to see further evidence, yet at the same time the vote for an increase dropped from 7-3 to 8-2 from last month. Overall the statement was marginally more bullish than September and there was no significant shift in futures with the market still pricing in a greater than 70% chance of an interest rate increase in December. Later in the week came the monthly employment report which, while slightly softer than expected, is unlikely to change that position. While non-farm payrolls came in at 161K against an expectation of 174K the previous month was revised significantly higher from 156K to 191K with average hourly earnings increasing to 0.4%. All eyes will be the US elections next Tuesday which could be the only event that stops a December interest rate hike in the event of Trump victory.


A mixed week for the Eurozone last week starting with an unexpected reduction in German retail sales printing at -1.4% against an expected increase of +0.2% yet the flash estimate inflation figure for the single currency came in at 0.5%. There was a slew of PMI data last week from the big four economies, most of which revealed expansion although generally softer than expected. One small piece of good news for the Eurozone on Friday was that PPI increased by 0.1% from a decrease of 0.2% last month, but the good news was short lived when you look at the underlying data which suggests that producer prices excluding energy declined by 0.3% which suggests that there is still very little inflationary pressure.


The bank of Japan was also in the news for its monthly data dump which turned out to have very little impact as the bank refrained from adopting any new changes following last month’s significant movements. With a 7-2 vote they kept interest rates at -0.1%.


Despite GDP coming in as expected at 0.2% the Canadian dollar struggled last week, predominantly due to the significant fall in oil prices. This was caused partly due to an unexpected surplus increase of over 14 million barrels on Wednesday, which was the highest single increase in stockpiles since records began in 1982, but also due to reduced optimism around the OPEC production freeze. Dropping over 9% on the week WTI closed at just over $44 per barrel, a four-week low. While there appears to be no immediate plans for further easing in Canada, should oil prices continue to struggle this could weigh heavily on the Canadian dollar.


As anticipated, the Royal Bank of Australia also left rates on hold on Tuesday following last week’s third quarter inflation figures. The RBA statement pointed to the fact that the economy is forecast to grow with inflation picking up gradually over the next two years. Producer inflation as well as retail sales also showed improvements leading to even greater confidence in inflationary pressures. New Zealand also got a boost this week with GDT prices jumping a rather large 11.4%. However New Zealand is still very much on an accommodative monetary policy pathway with inflation expectations unchanged at 1.7% and third quarter consumer inflation rising at a tiny 0.2% pace against 0.4% last quarter. Both economies have struggled this year with the slowdown in China, which is still yet to fully recover.

Source: Original content written by Andi Thornton for Clifton FX


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