Pound hits six month high in trade-weighted terms on Brexit optimism

ovember proved to be a particularly fruitful one for the Pound, with the currency ending it around 3.5% higher on the greenback. The UK currency received strong support following a report in the Times that suggested Britain and the EU could be close to striking an agreement on the Irish border ahead of the European Council summit later this month. This added to growing optimism of late over the state of the Brexit process, with investors now beginning to come around to the idea of a slightly smoother transitional Brexit period.

Today’s manufacturing PMI from Markit is forecast to show a modest uptick to 56.5 from October’s 56.3. However, with Brexit news continuing to dominate proceedings in the UK, economic news is likely to take a back seat.

Eurozone core inflation underwhelms again in November

The Euro benefitted from broad US Dollar weakness yesterday, with a disappointing inflation release causing no more than a very modest, temporary sell-off. The common currency clawed back almost the entirety of its losses for the week in a matter of a couple of hours, rallying back above the 1.19 level versus the greenback.

Yesterday’s inflation news in the Euro-area provided another blow to the European Central Bank in its quest to raise price growth to its ‘close to, but below’ 2% target. Headline inflation picked up pace last month according to the preliminary estimate, although at 1.5% year-on-year, once again fell short of economists 1.6% consensus. The core measure, of which strips out volatile components such as energy, was particularly underwhelming, remaining unchanged at 0.9% after investors had eyed an increase to 1.1%. Under such weak inflation dynamics, it is difficult to see a situation where the ECB even considers raising interest rates in the Eurozone until very deep into 2018, at the very earliest.

This morning’s Eurozone manufacturing PMI is expected to remain unrevised from the preliminary estimate. Absent a significant surprise here, we think the single currency is likely to be driven by events elsewhere today.

US Dollar ends winner streak on month end flows

The US Dollar ended a run of three straight daily gains during London trading yesterday, slumping to its lowest level in three days, largely due to month end positioning.

Economic news that we did have on Thursday was actually broadly positive. The Fed’s preferred measure of inflation, the PCE index, came in at a better-than-expected 1.6% in October, while there was also a welcome upward revision in the September number. Personal income growth was unchanged at 0.4% versus a 0.3% forecast, while consumer spending came in at a solid 0.3%.

All eyes now turn to whether the Republicans can finally push through Donald Trump’s long awaited tax overhaul. November’s US manufacturing PMI will also be released at 15:00 UK time.