Sterling Surges as Farage Retreats

Sterling rallies as Farage retreats and economy expands again; UK labour market data eyed today; Trump steps up to talk trade; RBNZ set to cut tonight

Previous Day's Market Highlights

Sterling surged by the most in almost a month on Monday, as investors were buoyed by positive GDP figures along with a potentially defining moment in the general election campaign.

Firstly, looking at the data, third quarter GDP figures pointed to the UK economy expanding at 0.3% QoQ, in line with expectations, and a solid bounce back from the second quarter's contraction. Expansion in the third quarter sees the UK avoid a technical recession, largely due to solid consumer spending, which increased by 0.4% QoQ. Furthermore, business investment was another positive, remaining flat over the quarter. While that sounds unremarkable, investment had previously declined in four of the previous 5 quarters, hence flat-lining being a positive. However, as expected, weakness in the manufacturing sector continues - as in other developed economies - with production declining by 0.4% in September alone, while stockpiling also added less to output than expected. Overall, the GDP report was by no means a bad release, and could have been worse given ongoing political uncertainties.

Speaking of politics, Monday's major election development came from the Brexit Party. Party leader Nigel Farage announced that he would not be standing candidates in any of the 317 constituencies which returned a Conservative MP at the 2017 general election, providing PM Johnson with a major boost, and increasing the chances of a Conservative majority come December. Farage's move has been designed to avoid splitting the 'leave' vote in the upcoming election, paving a clearer path for many Tory MPs seeking re-election. Nonetheless, the impact of today's strategy chance will only become clear in the coming weeks, while Farage's Party will still be standing candidates in all other seats in Great Britain.

For sterling, the increased chances of a Tory majority, and greater certainty over the nature of the UK's departure from the EU, resulted in significant gains. The pound added 0.85% against the dollar, the biggest gain since mid-October, hitting a 1-week high just below the $1.29 handle. Against the euro, sterling gained 0.6%, printing a 6-month high just shy of €1.17.

Meanwhile, geopolitical developments remained in focus, with ongoing US-China trade concerns, and another bout of violent protests in Hong Kong combining to dampen risk appetite. As a result, safe-haven FX remained well-supported, resulting in gains of around 0.2% for both the Japanese yen and Swiss franc.

Elsewhere, volatility was relatively muted, with liquidity thinner than usual due to the Veterans Day holiday in the US. The dollar ended the day a touch lower, around 0.2%, while most other G10 currencies, barring the kiwi dollar, were rangebound. The NZD added around 0.65%, with gains coming as a result of export-driven flows, in addition to the RBNZ 'shadow board' - an influential, independent body of economists who forecast the RBNZ's policy decisions - recommending that rates remain unchanged this week. Markets price a roughly two-thirds chance of a rate cut.

In other markets, risk appetite remained subdued, seeing both European and US equities struggle. The pan-European Stoxx 600 closed flat, while the US benchmark S&P 500 shed 0.2%. Finally, oil prices also struggled, waiting for fresh news on trade, with both Brent and WTI settling around 0.5% lower. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1655 1.1684 1.1525 1.36%
GBP/USD 1.2860 1.3012 1.2761 1.93%
EUR/USD 1.1035 1.1179 1.1013 1.48%
GBP/AUD 1.8760 1.9094 1.8546 2.87%
GBP/NZD 2.0295 2.0559 2.0003 2.70%
GBP/CAD 1.7020 1.7095 1.6724 2.17%

Today's Market Highlights

Despite today once again seeing a busy economic calendar, geopolitical developments are likely to remain front and centre. 

Of particular interest will be an address from President Trump at the Economic Club of New York, due to take place this afternoon. As always with the President, a whole range of subjects are likely to crop up, including; updates on US-China trade negotiations, another round of attacks on the Fed, the 2020 election campaign, or perhaps even a boast about the recent strong performance of equity markets - which appear to be Trump's favoured gauge of economic success. Whatever is mentioned, there is significant headline risk going into the event, with the possibility for sentiment to shift rapidly, and unpredictably, based on Trump's comments. Only once the speech starts will we know whether Trump will stick to prepared remarks, or veer off piste.

On the data front, today's calendar is well-populated. While general election campaigning remains key for sterling, investors will continue their health-check on the UK economy with this morning's labour market data. Unemployment is expected to remain unchanged at 3.9% in September, while earnings (both including and excluding bonuses) are expected to have risen by 3.8% YoY in the 3 months to September, both measures being unchanged from the previous release. While expectations are for the jobs market to remain relatively tight, any signs of softness in the data will increase the chances of a more dovish Bank of England, thus modestly pressuring the pound.

Elsewhere, a host of eurozone sentiment surveys are set to show businesses remaining relatively pessimistic, with the ZEW institute's bloc-wide survey set to decline to a 4-month low. The continued pessimism should be nothing new for market participants, with the manufacturing sector continuing to contract and downside risks becoming increasingly pervasive.

Overnight, focus will shift to New Zealand, and the RBNZ's latest monetary policy decision. Policymakers are likely to announce a 25bps rate cut, bringing rates to a fresh record-low of 0.75%, while also maintaining an easing bias, indicating that rates could be cut further if necessary. The RBNZ's rationale for providing additional policy accommodation is similar to many other G10 central banks, namely continued sub-par growth, sluggish inflation, and increasing downside risks to the outlook. A rate cut is around 66% priced in, hence the NZD remains vulnerable to both a cut, and the policy outlook.

Finally, a host of central bank speakers are also in play today, with Federal Reserve Vice Chair Richard Clarida topping the bill. As one of the 'big hitters' at the Fed, Clarida's remarks, which will likely confirm the Fed's 'wait and see' policy stance, will be closely examined. Investors will also hear from a few non-voting FOMC members, namely hawks Barkin and Harker, along with über-dovish Kashkari. From the ECB, Executive Board members Coeuré and Mersch will likely repeat their push for fiscal stimulus from eurozone governments.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Unemployment Rate (Sep) 3.9% 3.9%
9.30am GBP Average Earnings - Inc. Bonus (3MoY - Sep) 3.8% 3.8%
10.00am EUR Germany ZEW Survey - Economic Sentiment (Nov) -13.0 -22.8
10.00am EUR Euro Area ZEW Survey - Economic Sentiment (Nov) -32.5 -23.5
Tentative (pm) USD President Trump Speaks at Economic Club of New York
1.00am (Weds) NZD RBNZ Interest Rate Decision & Rate Statement 0.75% 1.00%