Boris Johnson has unsettled investors today after commenting that he expects Article 50 to be triggered in the beginning of 2017, weakening GBP exchange rates.
- GBP Slumps on Article 50 Talk – Exit process could begin in early 2017
- Mixed PMIs Fail to Dent EUR – Strong manufacturing undermined by weakness elsewhere
- USD Bullish as Markets Look to December Hike – Traders recover from September meeting disappointment
- GBP, EUR, USD Forecast; Only US Data Left – Panel appearance from hawkish Fed’s Mester could boost hike odds
Meanwhile the Euro is advancing despite mixed data and the US Dollar is strengthening as the markets focus on the strong possibility of tighter monetary policy in December.
US Dollar Remains Strong as Fed’s Rosengren Repeats Hawkish Call for Rate Hike
17.03, 23/09/2016: Boston Fed President Eric Rosegren has claimed that interest rates in the US need to be gradually raised, beginning immediately. According to Rosengren, the US labour market is on track to fall below a sustainable level of unemployment, which could cause the economy to overheat. Rosengren was one of the three policymakers who voted in favour of hiking rates during this week’s policy meeting.
Pound Slumps as Boris Johnson Suggests Article 50 Trigger in Early 2017
The Pound has weakened today after comments from Foreign Secretary Boris Johnson regarding the triggering of Article 50. According to Johnson;
‘The government is working towards an Article 50 letter which as you know will be produced, probably, in the early part of next year.’
From a market point of view, the initiating of the exit process will be the start of a large period of uncertainty. Data since the referendum may have been largely positive, but it is once the withdrawal negotiations begin that the future outlook for the UK will begin to take shape.
This overrode the positivity generated by a new report on trade. Produced by think tank Civitas, the report suggests that the EU is far more reliant upon the UK than the other way round in terms of jobs linked to trade. 3.6 million UK jobs are linked to trade with the EU, while 5.8 million jobs in the block are linked to trade with the UK.
According to the Civitas report;
‘Based on the potential impact on jobs, each EU country should be aware of the significant economic benefit in terms of jobs stemming from trade with the UK. The EU does arguably have to negotiate as a bloc. However, each of the 27 remaining national governments, with between 1.5 and 9.5pc of employment linked to UK trade, should be negotiating in the interests of those that democratically elected them.’
Euro Continues to Strengthen after ECB Moves Away from Easing Bias despite Weak PMIs
Eurozone growth hit a twenty-month low in September, according to today’s mixed preliminary data. Kicking off the day’s data slew were French gross domestic product figures, with the finalised figures unexpectedly revised lower. Initial expectations were for no quarter-on-quarter growth, but the updated data shows the economy actually contracted -0.1%, while year-on-year growth slowed ten basis points to 1.3%.
On the other hand, French PMIs all significantly outperformed forecasts. Manufacturing climbed to near growth territory after clocking in at 49.5, while the services PMI rose from 52.3 to 54.1 and the composite ticked higher from 51.9 to 53.3. This suggests an improving outlook for the French economy going forward, overriding some of the concerns raised by the latest GDP figures.
German manufacturing also saw a strong rise, although the services PMI dropped to barely above stagnation with a score of 50.6 and the composite index weakened further than expected to 52.7.
The Eurozone also saw a rise in manufacturing but a drop in services and the composite index.
Yesterday’s suggestions from the Economic Bulletin that the European Central Bank (ECB) were not inclined to ease monetary policy further continue to boost appetite for the Euro today, despite the less-than-desirable state of the data.
US Dollar Recovers as Markets Move Focus to Potential December Interest Rate Hike
The US Dollar may have taken a hit when the Federal Reserve left interest rates on hold on Wednesday, despite expectations it would do so, but USD exchange rates are now recovering. Markets have gotten over the initial disappointment and are focussing on the fact that there are strong indications monetary policy will be tightened in December, as had been hoped.
Fed Funds futures – instruments used by traders to hedge against the risk of rising or falling interest rates – reveal that the market is pricing in a 58.4% chance that interest rates will be hiked in the December policy meeting. Janet Yellen attempted to convince markets that November’s meeting was also ‘live’, but traders are not buying it considering the month also holds the US presidential elections.
As a result the US Dollar is currently strengthening against both the Pound and the Euro.
GBP EUR, GBP USD Exchange Rate Forecasts; Will Fed Officials Boost Hike Odds Further Tonight?
The rest of the day remains as devoid of UK data as the morning, while the Eurozone’s docket closed after the earlier PMI slew. Only US data is left for today, consisting of the Markit US manufacturing PMI and oil rig counts.
Also scheduled for this evening are panel appearances by Federal Reserve officials Patrick Harker, Loretta Mester and Dennis Lockhart at the Philadelphia Fed conference. Comments from these policymakers could alter market expectations for December, although only one of them – Loretta Mester – voted hawkishly in favour of a hike during September’s meeting.
Current GBP, EUR, USD Exchange Rates
The Pound Euro (GBP EUR) exchange rate is trending in the region of 1.1605, while the Euro Pound (EUR GBP) exchange rate is trending around 0.8617.
The Pound US Dollar (GBP USD) exchange rate is trending in the region of 1.3000, while the US Dollar Pound (USD GBP) exchange rate is trading near 0.7691.
The Euro US Dollar (EUR USD) exchange rate is trading around 1.1203, while the US Dollar Euro (USD EUR) exchange rate is trending in the region of 0.8923.