Sterling Lower Pre-GDP, Carney Testimony

Sterling slipped from its recent highs yesterday after an unexpected dip in mortgage approvals in October. Ahead of tomorrow’s 2nd assessment of Q3 GDP profit taking was maybe always going to happen; a fair few analysts, ourselves included, are of the opinion that expectations around the UK economy and its recovery may have got a little ahead of themselves of late.

That is not too say that we will not see further sterling gains in the coming days but we believe that GDP will not provide them tomorrow. We are still very bullish the pound versus the euro and comments yesterday from an ECB member only increased this.

Ardo Hansson is the Estonian central bank Governor and gave notice yesterday in an interview in Tallinn that “The options on rate cuts are still not fully exhausted and there are all kinds of other measures that are still on the table,” He continued with, “Of course, every time you use one option, you have one less to use. But I don’t see us, by any means, running out of our toolkit of things we can draw on.”

Following the recent chatter around negative rates in the Eurozone the euro has had its wing clipped as market participants remain wary of paying for deposits in Eurozone banks. We stated last week that we believe that negative rates are a bad idea for the Eurozone; bank lending would fall, the credit crunch that is affecting European SMEs would only get worse and the effect on inflation would be marginal.

Oil markets managed to regain the gap they made yesterday following the details of the Iranian nuclear agreement made over the weekend. The key market movement in the coming months will be in energy markets with oil prices sharply lower; something that central banks will have been hoping against.

The ECB blamed the recent disinflationary moves on falls in the oil price; a lower euro is likely if the oil market continues to slip on Middle Eastern olive branches. Spanish PPI fell 0.6% yesterday on the month and 0.2% on the year and the wider CPI release for the Eurozone is due Thursday.

With a lack of Fed speakers this week following a fortnight of hearing from nearly all of them, it is data that will do the dollar’s talking. Today’s consumer confidence numbers will be key before the holiday break. The previous release showed us a picture of a pre-shutdown economy that was expanding at a decent rate while stock market rises emphasised recent sentiment and wealth effects. The market is looking for another strong number today – a sign that the US economy was not hurt by October’s shenanigans in Washington.

We also get the latest manufacturing report from the Richmond Fed this afternoon, following a decidedly poor number from its Dallas counterpart yesterday.

Sterling volatility may come from Mark Carney’s testimony to the Treasury Select Committee on the latest inflation report starting at 10am GMT. Other than that the morning should be calm.