London Session Forex Recap – Nov. 3, 2016

  • SECO Swiss consumer climate: -13 as expected vs. -15 previous
  • U.K. services PMI: 54.5 vs. 52.5 expected, 52.6 previous
  • Euro Zone jobless rate: steady at 10.0% as expected
  • U.K. High Court rules against government on Brexit
  • BOE: 9-0 vote to maintain the Bank Rate at 0.25% as expected
  • BOE: 9-0 vote to continue government bond purchases up to £435 as expected
  • BOE: 9-0 vote to continue corporate bond purchases up to £10B as expected
  • BOE: “Monetary policy could respond, in either direction”

The pound was under the spotlight during today’s morning London session, thanks to the U.K. High Court’s ruling on Brexit and the BOE statement. What happened and how did the pound react?

Major Events/Reports:

U.K. High Court on Brexit – Earlier today, the U.K.’s High Court ruled on the government’s authority to trigger Article 50 of the TEU, which is the first step for an actual Brexit. And, well, the Court’s ruling broke the hearts of many Brexiteers because the Court concluded as follows:

“For the reasons we have set out, we hold that the Secretary of State does not have power under the Crown’s prerogative to give notice pursuant to Article 50 of the TEU for the United Kingdom to withdraw from the European Union.”

You can read the full 32-page text of the Court’s ruling here, or you can read a 2-page summary here, if you really want to.

Anyhow, the High Court’s ruling has effectively put a stop to Theresa May’s plans to trigger Article 50 of the TEU by March of next year. In order to trigger Article 50 of the TEU, a vote from Parliament is now needed. And who knows how long that will be or when it will start (or if the politicians will vote for or against it). There are already reports flying around that the government will be appealing directly to the Supreme Court in December, though, but that still leaves only a few months before Theresa May’s March target.

U.K. services PMI jumps – Markit released its October services PMI report for the U.K. earlier. And its headline reading jump from 52.6 to 54.5, which is the highest reading since January of this year.

Commentary from the PMI report was also pretty upbeat overall. Incoming new businesses, for example, “rose at the fastest rate in nine months.” The service sector also continued to generate jobs, with employment increasing for the third month running.

The only disappointing thing is that “Input price inflation surged to the highest since March 2011, with a survey-record month-on-month acceleration.” If this surge is sustained, then “the increase in prices threatens to curb both corporate hiring and consumer spending, as firms seek to reduce staff costs and households see their pay eroded by rising inflation.”

ECB economic bulletin – According to the ECB’s economic bulletin, “economic recovery in the euro area is continuing, notwithstanding some weather-induced volatility in the first half of 2016.” The ongoing recovery was attributed to the consumer spending. And “consumption should continue to grow at a steady pace” going forward, the ECB said.

And while business investment slowed in Q2, “Incoming information suggests that business investment grew moderately in the third quarter of 2016.” Even better, “The recovery in business investment is expected to continue beyond the next quarter.”

As for the jobs market, “Euro area labour markets continue to improve gradually.” The only somewhat dark spot on the economic bulletin was the ECB’s views on inflation. To be more specific, “Most measures of underlying inflation do not show any clear signs of an upward trend,” with import price inflation in the red and “subdued” wage growth.

Risk appetite returns – European equity indices got some buyers during the course of the morning London session.

  • The pan-European FTSEurofirst 300 was up by 0.43% to 1,313.95
  • The blue-chip Euro Stoxx 50 was up by 0.47% to 2,997.00
  • Germany’s DAX was up by 0.21% to 10,393.00

U.S. equity futures also got some support.

  • S&P 500 futures were up by 0.25% to 2,097.50
  • Nasdaq futures were up by 0.06% to 4,719.50

British equities didn’t take the Court’s ruling positively, though, likely because the ruling caused the pound to spike higher, which is bad for British exporters.

  • The U.K.’s FTSE 100 was down by 0.25% to 6,828.00

Another sign of risk-taking was the fact that precious metals, which are considered as traditional safe-havens, got smacked really hard.

  • Gold slumped by 1.56% to $1,287.80 per troy ounce
  • Silver slumped by 3.50% to $18.038 per troy ounce

Market analysts pointed to solid earnings reports for the upbeat mood, but the U.K. High Court’s ruling on Brexit also likely helped to improve sentiment, since European equity indices (other than British equities) got a boost after the Court’s ruling was revealed.

MPC rate decision and minutes – The BOE’s MPC released the minutes for its monetary policy huddle, as well as its quarterly inflation report, and below are some of the more important and/or interesting points in, well, bullet points for easier reading:

  • The MPC unanimously voted to maintain the BOE’s current monetary policy.
  • 9-0 vote to keep the Bank Rate at 0.25%.
  • 9-0 vote to continue government bond purchases up to a total of £435.
  • 9-0 vote to continue corporate bond purchases up to a total of £10B.
  • The “indicators of activity and business sentiment have recovered from their lows immediately following the referendum.”
  • Also, the “preliminary estimate of GDP growth in Q3 was above expectations.”
  • The above two points “suggest that the near-term outlook for activity is stronger than expected three months ago.”
  • Household spending appears to have grown at a somewhat faster pace than projected in August.”
  • Moreover, “the housing market has been more resilient than expected.”
  • By contrast, investment intentions have continued to soften and the commercial property market has been subdued.”
  • Output growth is expected to be stronger in the near term but weaker than previously anticipated in the latter part of the forecast period.”
  • This reflects “the impact of lower real income growth on household spending” and ” uncertainty over future trading arrangements.”
  • 2016 GDP forecasted at 2.2% (2.0% back in August)
  • 2017 GDP forecasted at 1.4% (0.8% back in August)
  • 2018 GDP forecasted at 1.5% (1.8% back in August)
  • CPI is expected to shoot up faster, “Largely as a result of the depreciation of sterling.”
  • 2016 CPI forecasted at 1.3% (1.2% back in August)
  • 2017 CPI forecasted at 2.7% (2.0% back in August)
  • 2018 CPI forecasted at 2.7% (2.4% back in August)
  • In the nearer term, unemployment is expected to worsen at a slower rate than originally thought.
  • 2016 jobless rate forecasted at 4.9% (5.1% back in August)
  • 2017 jobless rate forecasted at 5.4% (5.5% back in August)
  • 2018 jobless rate forecasted at 5.6% (5.5% back in August)
  • Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target.”
  • This is a noticeable shift from the the previous statement, when “a majority of members expected to support a further cut in Bank Rate.”

Major Market Movers:

GBP – The pound was already getting some buyers early on, probably because of the jump in the services PMI reading. However, the pound later got a major bullish infusion when the High Court concluded that the Theresa May’s government has no power to trigger Article 50 of the TEU. The pound then got a final boost after the BOE decided to keep rates steady.

GBP/USD was up by 84 pips (+0.68%) to 1.2423, GBP/JPY was up by 142 pips (+1.12%) to 128.17, GBP/CHF was up by 118 pips (+1.00%) to 1.2090

AUD – The prevalence of risk-taking during the session likely enticed forex traders to load up on the higher-yielding Aussie.

AUD/JPY was up by 32 pips (+0.41%) to 79.14, AUD/CHF was up by 22 pips (+0.29%) to 0.7465, AUD/CAD was up by 14 pips (+0.13%) to 1.0268

Watch Out For:

  • 12:30 pm GMT: Press conference with BOE Guv’nah Mark Carney
  • 12:30 pm GMT: U.S. initial jobless claims (256K expected, 258K previous)
  • 1:45 pm GMT: Markit’s final U.S. services PMI (no change from 54.8 expected)
  • 2:00 pm GMT: U.S. factory orders (0.2% expected, same as previous)
  • 2:00 pm GMT: ISM’s U.S. non-manufacturing PMI (56.0 expected, 57.1 previous)
  • 8:55 pm GMT: BOE Deputy Governor Jon Cunliffe is scheduled to speak

See also:

Asian Session Forex Recap

U.S. Session Recap

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