The Dollar, which had appreciated about 2.2% in the second half of October, gave back a third of its gains yesterday on the first day of November. The weaker-than-expected US manufacturing PMI data for October were partly to blame, with the index down to 57.7 from 59.8 in September. There was also a sense that perhaps the Dollar rally had been overdone while other major currencies, in particular Sterling, finally got on the front-foot.
The EUR/USD cross is back to where it began the week around 1.14 but it is the surge in GBP/USD back to 1.30 which has been more impressive. Sterling, battered by speculation that the Brexit train was going nowhere fast, got a double boost yesterday. First, there were reports that the UK and EU had reached a tentative Brexit deal covering the important UK financial services sector and Brexit Secretary Dominic Rabb said that a Brexit deal could be reached by 21 November. The government’s blueprint for Brexit had been somewhat vague on the issue of the financial sector in the hope of negotiating a deal which gave the UK a fair degree of freedom – something EU negotiators had pushed back against. Few details have been released at this stage but markets have taken these headlines at face value.
Sterling got a second shot in the arm after the Bank of England suggested that it could hike rates faster than planned if a Brexit deal was agreed and that it could still hike rates even if the UK left the EU without a deal. This was fighting talk from the Monetary Policy Council and analysts now expect 2-3 rate hikes next year, from 0.75% currently, conditional on a Brexit deal being in place by end-year. Like the budget, UK interest rate policy is ultimately being largely conditioned by what happens next on the Brexit front and all predictions, and arguably currency moves, need to be taken with a healthy pinch of salt.
