Brexit Talks Go Down To The Wire Preview

Sterling gains as UK-EU talks close in on a deal; a host of economic releases miss expectations; geopolitics remains in focus today

Previous Day's Market Highlights

Wednesday was a day of conflicting headline, after conflicting headline, for the pound, which traded in a choppy manner and spent the majority of the day going up and down like a fiddler's arm. Initial reports that the Government were downbeat on the chances of a deal being agreed saw sterling briefly tumble below the $1.27 handle, before regaining some ground. A slew of rumours and counter-rumours about the state of negotiations then followed throughout the day; leaving most market participants in a frenzy, and resulting in the pound yo-yoing within a huge 200 pip range. Interestingly, sterling has now experienced a trading range of greater than 100 pips on each of the last 5 trading days - volatility seems to have finally returned to the FX markets.
Overall, however, while the two sides remain close to an agreement, a deal has yet to be formally agreed. The reported sticking point is arrangements over the collection of VAT under the new Irish border arrangements, while concerns continue to linger that the DUP -- the Conservative Party's confidence and supply partners -- will be unable to back the deal. The increasing chances of a deal saw sterling gain ground, though the pound finished well off the highs of the day. Against the dollar, sterling ended the day 0.55% higher, pulling back from a fresh 5-month high above $1.2850. The pound chalked up a similar gain against the euro, adding 0.35%.
Elsewhere, a multitude of economic data points were released, with many surprising to the downside. From the UK, September's inflation data was softer than expected, showing CPI continuing to increase at 1.7% YoY, unchanged from the previous release, and remaining at the slowest pace since late-2016. While sterling was unfazed by the release, having bigger matters to deal with, the inflation outlook appears relatively benign, likely keeping BoE policy on hold for the foreseeable future - barring a potential no-deal Brexit.
CPI figures from the eurozone and Canada also came in below expectations. In the eurozone, CPI increased by just 0.8% YoY in September, an extremely subdued pace, while core CPI increased by just 1% YoY. The continued sluggish pace of price increases, and downtrend in inflation, provides further evidence that the ECB's sweeping stimulus package was necessary, though the full effects of the policy measures will not be felt for some time. The euro settled around 0.3% higher at the end of trading, benefitting from a weaker dollar, and largely ignoring the data. From Canada, CPI increased at 1.9% YoY last month, raising the prospects of a the BoC loosening policy before year-end. The loonie was largely unmoved after the release.
Across the pond, the dollar struck a softer tone, shedding 0.2% against a basket of peers, after disappointing retail sales figures raised concerns over the health of the US economy. For the first time in seven months, sales declined in September, falling by 0.3% on a month-on-month basis. Sales excluding automobiles also declined, falling 0.1% MoM. Bearing in mind that consumer spending has been the main driver of US economic growth for the previous couple of quarters, signs that a slowdown in consumption may be gathering pace gives cause for concern. The slowdown in spending also raises the chances of a further Fed rate cut this month, with such an outcome now 88% priced in.
Overnight, the Aussie dollar has gained ground, after a solid employment report dampened the chances of an additional RBA rate cut next month. Data showed the Australian economy added 14,000 jobs in September, while unemployment fell to 5.2%.
Away from FX, European equity markets settled unchanged, with market participants closely monitoring the progress of Brexit talks - the pan-continental Stoxx 600 closed flat. In the US, equities lost ground, with the benchmark S&P 500 closing 0.2% lower. Finally, oil prices firmed amid hope that OPEC would extend supply cuts into next year. Both benchmark Brent and US WTI crude settled 1% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1530 1.1631 1.1086 4.69%
GBP/USD 1.2765 1.2854 1.2195 5.13%
EUR/USD 1.1075 1.1068 1.0879 1.71%
GBP/AUD 1.8825 1.9094 1.8076 5.33%
GBP/NZD 2.0300 2.0559 1.9311 6.07%
GBP/CAD 1.6865 1.6995 1.6191 4.73%

Today's Market Highlights

Brexit will remain in focus today, with UK-EU talks set to come to a conclusion early this morning, ahead of the EU Council Summit beginning just after lunchtime. Market participants will continue to look for signs that the two sides are inching closer to a deal, while also paying close attention to the Parliamentary arithmetic in Westminster, and whether any negotiated deal would pass in the Commons. It is unclear whether EU leaders will give formal sign off on a deal at the Summit, or whether they would prefer the UK to prove that a deal would pass in the Commons - likely via an indicative vote on Saturday - before signing off on the legal text. In the run up to, and during, the Summit, expect another barrage of conflicting headlines and rumours, which should result in another volatile day for the pound. The trading playbook remains the same, however; a deal, or moves towards a deal, would result in sterling upside; moves away from a deal would see sterling downside. 
Meanwhile, today's data calendar sees little in the way of top-tier data releases. From the UK, though likely to be ignored by markets, September's retail sales data is due. Sales are expected to remain relatively subdued, with consumers perhaps reluctant to increase spending in light of continued Brexit-linked uncertainties. Headline sales are expected to remain flat on a month-on-month basis; though, excluding fuel, sales are set to fall by 0.1% MoM.
In the US, a number of releases are due, though investors are set to continue headline watching, on alert for any developments in US-China trade relations. On the data docket, both September's housing starts and building permits are expected largely unchanged from the previous release, at 1.32mln and 1.35mln respectively. At the same time, weekly jobless claims are expected to fall broadly in line with the 4-week average of 214k, while September's manufacturing index from the Philadelphia Fed is set to decline for a third consecutive month, expected at 8.0.
Turning to monetary policy, today's central bank speaking calendar is busy, as policymakers continue to attend the annual World Bank-IMF meetings in Washington DC. Of particular interest will likely be remarks from RBA Governor Lowe, with continued speculation that unconventional policies - such as quantitative easing - will soon be introduced down under. Also due will be remarks from Fed voters Bowman, Williams and Evans; along with scheduled comments from ECB Governing Council members Knot and de Cos.
Finally, third quarter earnings season continues on Wall Street, with Morgan Stanley - one of the worst performing bank stocks this year - set to report before the bell.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Retail Sales (MoM - Sep) 0.0% -0.2%
13.30pm USD Housing Starts (MoM - Sep) 1.32mln 1.36mln
13.30pm USD Building Permits (MoM - Sep) 1.35mln 1.43mln
13.30pm USD Initial Jobless Claims (Oct 11) 215k 210k
13.30pm USD Philadelphia Fed Manufacturing Index (Oct) 8 12