26 Oct 2017

Market Brief: Super Mario bothers to tell the QE taper plan!

Kevin Musisi

Dealing team

The pound rallied over a cent against the euro and dollar yesterday morning following the much anticipated UK GDP release.

Today's data releases
  Key levels
11:00 CBI data   Support Resistance
12:45 ECB decision GBP/USD 1.3088 1.3338
13:30 Draghi press conference GBP/EUR 1.1071 1.1300
13:30 Initial jobless claims  
Market overview

The pound rallied over a cent against the Euro and Dollar yesterday morning following the much anticipated UK GDP release. Preliminary GDP figures showed that the UK economy expanded 0.4% in Q3 (consensus +0.3%, Investec +0.3%) following growth of 0.3% in both Q2 and Q1.On a year-on-year basis, growth was similarly firmer than expectations at 1.5% in Q3 (consensus +1.4%, Investec +1.4%), unchanged from Q2. On a sectoral basis, the Construction sector disappointed, however the all-important Services sector continued to shoulder growth, with there being further strength coming in from the industrial sector.

Yesterday’s print effectively cements expectations that the Bank of England will raise interest rates for the first time in ten years at its 2nd November meeting. Markets were pricing in an 80% chance of a rate hike at the start of the week, but this rose to 89% soon after the GDP release. With the Pound having a good day yesterday, it’s also worth noting that the export-focussed FTSE lost around 1.0% on the day. 

In other news, South Africa’s Rand sank to its lowest level this year as the unwinding of long positions sent the currency beyond key technical levels, which may prompt more losses. The rand suffered as Finance Minister Gigaba painted a bleak picture of the state of the country’s finances in his first mid-term budget yesterday, with growth and revenue set to fall well short of projections made in February. In Canada, rates were kept on hold yesterday.

Across the pond, there was a raft of US data out yesterday afternoon. Durable Goods Orders and housing reports both beat the forecasts, with Durable Goods Orders soaring 2.2%, crushing the estimate of 1.0% and Core Durable Goods Orders gaining 0.7%, above the estimate of 0.5%. Also yesterday, New Home Sales jumped to 667k, well above the forecast of 555k. The USD however struggled as speculation continued about who the next Fed Chair will be. It was reported that President Trump is now thinking about giving Janet Yellen another term as Fed chair - instead of a more hawkish candidate - as he balances his desire to put his stamp on central bank with the risk of changing the leadership amid a stock market rally. 

The day ahead

Turning our attention to the day ahead… well it’s all going to be about the ECB and Mario Draghi. How much will the ECB taper (or recalibrate, using the ECB buzzword!) QE and for how long will they run the programme? These are the golden questions. Market expectations are for the ECB to trim QE purchases to about half the current EUR60bn/month pace while extending the programme for six or nine months beyond the current December 2017 end date. Although there are many permutations around that core expectation that may be perceived as more hawkish or dovish than the central outlook, so it could be a lively session. In terms of timings – 12.45 is the rate and any QE announcement, with Draghi’s press conference to follow at 13.30. Stateside, we have Initial Jobless Claims at 13.30 and this morning watch out for the UK CBI Distributive Trades data at 11.00.

Thought of the day

On this day 70 years ago, Hillary Diane Rodham was born. She would go on to be one of most famous female politicians of her time: US Senator from New York, US Secretary of State for Barack Obama and running for President herself, ultimately just losing the presidential races to Barack Obama in 2012 and Donald Trump in 2016. Of course she is now better known as Hillary Clinton and served as First Lady for 8 years alongside her husband Bill. Although through the course of her career she has divided opinions, Clinton has been breaking boundaries and paving the way for others for a long time. She trained as a lawyer and became the first female partner of her firm, was elected as the first female senator from New York and then became the first female presidential nominee from the two major parties in the US. After the rollercoaster year Clinton has had, she could be forgiven for taking some time out and relaxing on her birthday. If the FX markets are making you feel your age, then give the Investec dealing desk a call today to let us give you some insight and some ideas to help those years drop off!

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