Rate Hike moves from Certain to Probable

Inflation and Employment data to provide confirmation.

There have been several factors driving the recent rally in the value of the pound. The two primary ones have been the agreement of a Brexit transition period and the prospect of a rate hike.

Since there are clear opposites to those positives; the reality of Brexit and life outside the single market and what happens post any rate hike, it is most likely that sentiment that has been the single most important contributor to the rally. Over the past week, the economic data coming from the UK has been a little weak, not sufficient to derail talk of a rate hike but certainly sufficient to raise doubts.

The interest rate futures markets are now predicting a 66% chance of a hike, down from 70%. One positive piece of data this week was the 2.7% rise in house prices, but this has been overshadowed by the continued decline in the number of properties sold which is arguably the more important statistic.

The pound finally managed to break and hold above the 1.1500 level versus the single currency reaching a high of 1.1567 before closing at 1.1543. Against the dollar, Sterling is still struggling to break through stubborn resistance at 1.4240 despite several attempts.

A day of consolidation is likely as the market prepares for a highly significant week for the short/medium term direction of the currency.

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ECB minutes spook Euro

The market reacted to the news of ECB concerns over Euro strength and the effect of a trade war contained in the minutes of its most recent meeting despite the concerns having cooled this week.

The Central Bank’s worries over the strength of the single currency could place in jeopardy plans to consider the removal of the Asset Purchase Scheme towards the end of the year. With inflation at 1.4%, any currency strength could see that fall to below 1%. Mario Draghi’s ongoing concern is to provide sufficient assistance to the weaker economies of the region to grow. So far, they have coped very well with the strengthening of the currency over the past eighteen months but a sustained rise to or above 1.3000 could be a bridge too far.

The Euro’s reaction came mainly against the pound while versus a weak dollar in remained in a relatively tight range. It reached a low of 1.2299, close to the bottom end of its recent range but didn’t come close to testing strong support around 1.2260.

Next week sees the release of pan-Eurozone inflation data with the MoM data expected to fall to 0.9% although YoY is expected to remain at 1.4%. That should prove to be “currency neutral” as the single currency remains reactive to other G7 currencies.

“Trump risk” still a factor.

It seems that the National Security Committee got to the President just in time. From his totally gung-ho tweets from the day before telling the Syrian regime to expect rockets, he toned down the rhetoric to say that the timing is still fluid. It is becoming more difficult to separate fact from fiction with this President as he struggles with what he wants to do and what he is able, or what is prudent, to do.

The seeming move to a more considered approach lowered risk aversion a little and the dollar rallied, moving away from recent support levels. It reached a high of 89.96 before falling back a little to close at 89.78. It has remained close to its previous close overnight.

Next week there are some important data releases which may give traders a clue to what is happening in the U.S. economy and will remain as drivers of the currency once risk aversion returns to “normal”.

Retail sales and Industrial Production are the most noteworthy but there are also speeches by several members of the FOMC which may shed some light on how hawkish the committee is going to be going forward.