Another trading day, another drop in the value of sterling. At the time of writing it is below 1.27. The market seems to have de-coupled from the economic data, which actually suggests that the UK economy is doing ok. This decoupling will be confirmed if we get a better than expected services sector PMI this morning at 0930 BST, and the pound continues to decline.
The pound is the unfortunate victim of politics. There is a huge array of actors on the European stage, and all of them have a stake in the UK’s Brexit plans. Thus, negative comments from the Czech Prime Minister or the Maltese prime minister can have a material effect on the pound right now. This is making it very hard for investors to cut through the political noise and get a handle on what the UK’s Brexit negotiations are actually going to look like. This all adds to the uncertainty facing the UK and its future relations with its neighbours and biggest trading partners, which is bad, bad news for sterling.
UK Gilts decoupling from economic data?
Interestingly, the UK gilt curve is also following the political path. The 2-year spread between UK and US yields is in negative territory, which is also weighing on GBP/USD (see the chart below). The bond market seems to be betting on a dovish response from the Bank of England to cushion the blow from the Brexit fallout. Right now though, the market seems to be asking the BOE to react to the political noise, not the hard economic data.
ECB done with QE?
The other big news yesterday was the announcement from the ECB that it was nearing a consensus on tapering QE before the end of the programme. Of course, this doesn’t actually tell us anything, but it does suggest that the ECB won’t keep policy loose forever. The significance of yesterday’s announcement is important for traders for two reasons: 1, if the ECB does taper QE early then interest rates may start to move out of negative territory, which could be good news for Europe’s beleaguered banking sector (see DB comments below), since negative interest rates erode banks’ profitability. 2, it highlights the dovish position of the BOE, which could weigh on the pound even further.
Deutsche bank rallies on ECB news
Interestingly, on the back of yesterday’s ECB news, Deutsche Bank (DE:DBKGn), whose shares have fallen by a massive 50% this year on the back of fears for its capital position and concerns over a fine from the US Department of Justice, has seen a boost to its share price today, which is currently up over 1.5%. Perhaps the ECB’s news will take the pressure off the German government to bail out DB? Angela Merkel has nothing to gain politically from bailing out DB, thus the ECB’s move may take the pressure off Berlin to intervene in the near-term at least.
The FTSE 100 takes a breather
The FTSE 100 has backed off its near record high yesterday, but remains above the key 7,000 level. Not even a massive lift from Tesco (LON:TSCO), who announced earnings today, could boost the overall level of the FTSE100. We think that this is a temporary pullback, allowing traders to take profit before attempting to push this index higher.
US data could steal the limelight this afternoon. We have non-manufacturing ISM, durable goods and the ADP private sector payrolls report. This data will be scrutinised to see if it justifies a December rate rise from the Fed. Strong data could further extend the dollar rally, while any signs of weakness could help the pound to recover.
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