Hopes of a Brexit Deal Rekindled

Sterling surges as the UK & EU close in on a Brexit deal; trade headlines dominate risk sentiment; inflation and retail sales releases eyed

Previous Day's Market Highlights

Brexit optimism was rekindled on Tuesday, with various reports ratcheting up expectations of the UK and EU striking a new Brexit deal. The EU's Chief Negotiator Barnier was the catalyst behind sterling's initial rally, after stating that a deal is "still possible this week" - raising expectations that the two would reach an agreement. Later in the day, sterling pushed higher, following Bloomberg reports from EU sources that negotiations on both sides of the Channel were closing in on a draft agreement, with the text of such a deal dependent on the support of the DUP. Talks over a potential agreement went on well into the night in Brussels, and will continue this morning. Meanwhile, the DUP do not yet appear to be onside, which may hamper the chances of any deal passing through Parliament. Nonetheless, sterling surged higher on hopes of an agreement being struck, rallying to 5-month highs against both the dollar and euro. Cable (GBP/USD) added 1.3% over the course of the day, stalling just before the $1.28 handle. The pound added a similar amount against the euro, hitting its highest levels since early May, just shy of €1.16.
As an aside, yesterday's Note was out of date within 20 minutes of it arriving in your inboxes, such is the fast-moving nature of the situation. Hopefully today's Note has a little more longevity!
Elsewhere, markets seemed to struggle for direction, with ongoing US-China trade tensions resulting in dampened risk appetite. Reports that China is seeking the US to remove retaliatory tariffs - namely those planned to increase in December - in order to allow the promised agricultural purchases to take place casted further doubt on Friday's supposed 'mini' trade deal, with tensions between the two superpowers seemingly beginning to increase. This resulted in havens -- including the dollar, yen and franc -- remaining relatively well-supported, while the Aussie and Kiwi dollars both struggled to gain ground.
On the data front, a number of economic reports were released, though had little overall impact on price action. From the UK, August's labour market figures were a touch softer than expected, with the tight jobs market perhaps beginning to lose momentum. Unemployment increased to 3.9%, a touch above a 44-year low, while average earnings -- both including and excluding bonuses -- increased at 3.8% YoY. Elsewhere, the euro added around 0.2% after better than expected, though still pessimistic, sentiment surveys from the ZEW economic institute. Germany's sentiment index printed -22.8, largely unchanged from last month, providing further evidence of the fragile momentum in the eurozone's largest economy. The euro was also well-supported by the positive Brexit news.
Elsewhere, the IMF's latest World Economic Outlook saw the Fund forecast global growth to fall to its slowest pace since the financial crisis this year, at just 3.0%. The IMF warned that tit-for-tat tariff impositions would significantly dent growth, while adding that the ammunition to stave off a downturn is limited. While the pessimistic outlook from the IMF is not unexpected, it will heighten concerns over a possible recession in the coming quarters.
Away from FX, equity markets gained on both sides of the Atlantic. In Europe, the pan-continental Stoxx 600 closed more than 1% higher, buoyed by hopes of an orderly Brexit. Meanwhile, across the pond, the US benchmark S&P 500 gained 1%, supported by a strong start to third quarter earnings season. Finally, oil prices lost ground, with both Brent and WTI crude settling around 1% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1570 1.1593 1.1086 4.37%
GBP/USD 1.2770 1.2799 1.2195 4.72%
EUR/USD 1.1035 1.1062 1.0879 1.65%
GBP/AUD 1.8955 1.8964 1.8076 4.68%
GBP/NZD 2.0360 2.0366 1.9311 5.18%
GBP/CAD 1.6870 1.6912 1.6191 4.26%

Today's Market Highlights

Geopolitics is, once again, set to dominate today, with focus primarily falling on ongoing UK-EU Brexit talks. Negotiations continue this morning, with the finalities of a deal likely being hammered out after yesterday's late night discussions. Meanwhile, the various pieces of the political jigsaw seem to be slotting together to result in the presentation of a draft agreement. On the EU side, Chief Negotiator Barnier will brief EU Ambassadors early this afternoon, deciding whether the deal will be brought forward at Thursday's summit. In Westminster, PM Johnson will chair a Cabinet meeting at 4pm, presumably to disclose details of the agreement, before addressing the 1922 Committee of backbench Tory MPs this evening. The playbook for the pound remains the same as ever; moves towards, or agreement of, a deal, would result in upside, while a reduction in the chances of a deal would result in sterling downside. 

Market participants will also pay close attention to any trade-related headlines throughout the day, which will be a key driver of risk sentiment.
Meanwhile, away from geopolitics, today sees a number of important economic releases. Inflation data, referencing September, will be eyed from the UK, eurozone and Canada, with market participants continuing to price in monetary policy easing in all three of the aforementioned countries. In the UK, CPI inflation is expected at 1.8% YoY , a modest uptick from the previous release and moving closer to the BoE's target. Nonetheless, sterling will likely ignore the release, with focus remaining on Brexit developments, and BoE policy unlikely to be altered barring a no-deal departure from the EU. Elsewhere, final data from the eurozone should confirm CPI at 0.9% YoY, and core CPI at 1% YoY, providing further evidence to support the need for the ECB's sweeping stimulus programme.
Across the pond, Canadian CPI is set to rise at its fastest pace since May, at 2.1% YoY. However, and of concern for the BoC, CPI is expected to fall by 0.2% on a month-on-month basis, the second straight monthly decline. From the US, September's retail sales figures will be eyed, with consumer spending continuing to be the growth engine of the US economy. Headline sales are expected to increase by 0.3% MoM, a 7th straight monthly increase, while sales excluding autos are expected to increase by 0.2% MoM. A better than expected release may weaken the case for a further 25bps rate cut later this month. Speaking of monetary policy, the Fed's Beige Book -- containing anecdotal evidence of regional economic conditions -- will be released this evening.
Staying with monetary policy, today's central bank speaking calendar is well-populated, while market participants will continue to pay some attention to the ongoing World Bank-IMF meetings. Of the speakers, two addresses from BoE Governor Carney are of particular interest, while investors will also hear from voting FOMC members Evans and Brainard. Finally, third quarter earnings season continues on Wall Street, with investors looking for Bank of America and BNY Mellon to continue yesterday's theme of strong financial earnings.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP CPI (YoY - Sep) 1.8% 1.7%
9.30am GBP Core CPI (YoY - Sep) 1.7% 1.5%
10.00am EUR Final CPI (YoY - Sep) 0.9% 0.9%
10.00am EUR Final Core CPI (YoY - Sep) 1.0% 1.0%
13.30pm USD Retail Sales (MoM - Sep) 0.3% 0.4%
13.30pm USD Retail Sales ex Autos (MoM - Sep) 0.2% 0.0%
13.30pm CAD CPI (YoY - Sep) 2.1% 1.9%
19.00pm USD Fed Releases Beige Book