Within major developing currencies it has been a case of which currency has been under the least pressure, rather than which currency has been the strongest. The Dollar yesterday shed nearly 0.5% after Federal Reserve Chairperson Powell said that the Fed fund rate was near its neutral rate, a significant u-turn from his far more hawkish comments in October and which markets have seemingly interpreted as pouring further cold water on the idea that the Fed will continue to hike rates aggressively in 2019. Weaker-than-expected PCE inflation data for October further hammered home the point that US inflationary pressures remain modest and may not require much more tightening of US monetary policy. The Dollar slide has been far more modest today but it is clear that Powell’s comments continue to reverberate.
Despite the Dollar’s weakness the GBP/USD cross remains very volatile around the 1.28 level and in trade-weighted terms Sterling is hovering near a three-month low. The Treasury and Bank of England have both in the past 24 hours released reports which forecast, based on a number of assumptions, that the UK economy will be worse off if the UK leaves the EU in March with the current Brexit deal on the table and considerably worse off if it exits the EU without a place in deal.
These conclusions were not unexpected and most analyses by domestic institutions and international organisations have concluded that there would be a net economic and financial cost to the UK of leaving its current set-up with the EU. Prime Minister also May countered that the current deal on the table delivered hard-to-measure positives, including greater UK sovereignty and control over immigration and ultimately delivered on the wish of the people. This rhetoric has lost its potency and price action suggests that markets are increasingly nervous about the implications for Sterling should parliament vote down the Brexit deal on 11 December and head towards a hard Brexit.
The Swiss Franc was also under pressure today, shedding 0.5%, after data revealed that the Swiss economy had contracted 0.2% qoq in Q3 and GDP growth slowed to 2.4% yoy. Swiss growth in recent quarters has been among the fastest in the developing world but it has clearly run out of steam, in line with other European economies. Nevertheless, the Swiss Franc remains broadly range-bound which in itself may be putting the Swiss economy’s export sector under some pressure.
