01 Dec 2017

Market Brief: Brexit optimism lifts the pound

Kevin Musisi

Dealing team

There was some troubling news from the UK high street this morning as November’s GfK consumer confidence measure edged down slightly more than expected to -12 from October’s -10.

Today's data release
  Key levels
10:00 EU CPI estimate   Support Resistance
13:30 US initial jobless claims GBP/USD 1.3230 1.3650
13:30 US PCE deflator GBP/EUR 1.1095
1.1410
Market overview

There was some troubling news from the UK high street this morning as November’s GfK consumer confidence measure edged down slightly more than expected to -12 from October’s -10, equalling the low seen in the immediate aftermath of June 2016’s EU referendum. Of the sub-components, the biggest fall was seen in the major purchase index which fell 6pts, which may pose a worry for retailers with Christmas just around the corner. Clearly the continued squeeze on real household incomes and the November interest rate hike from the BoE is weighing on consumers’ confidence.

Despite the downbeat news, the pound remains undeterred soaring to two month highs after positive Brexit news. Yesterday began with reports of an agreement between the UK and Europe over the size of the Brexit divorce bill; a major stumbling block that had prevented a meaningful progression in talks. Then overnight, The Times reported that Dublin and London are close to an agreement on the Irish border, moving closer to a Brexit deal. The newspaper also went on to report that EU leaders are preparing to offer a 2-year Brexit transition deal as early as January after negotiators said that they were close to a breakthrough over the Northern Ireland border. Market optimism seems to firmly suggest that Brexit talks can now progress to trade and the UK’s post-Brexit position.

Crossing over to the US, news has emerged that monetary economist Marvin Goodfriend has been nominated by President Trump to be a Governor at the Fed. Professor Goodfriend has previously questioned the use of QE post 2008 and was instead said to favour negative interest rates. As the Fed seeks to normalise rates next year, while balancing the level of QE, comments from the new Governor will draw a lot of interest. Sticking with the Fed, Janet Yellen gave her final testimony to Congress as Fed Chair. As expected, Dr Yellen towed the party line suggesting the Fed will continue to tighten policy at a gradual pace, so long as the data continues to support that course of action.

The day ahead

Looking ahead today, EU inflation data takes centre stage this morning with the CPI estimate due at 10am. This afternoon we have the Fed’s favoured measure of inflation (PCE) due at 1.30pm before we hear from various Fed speakers over the course of the afternoon.

Thought of the day

Ray Dalio is the founder of Bridgewater Associates, a hedge fund billionaire and one of the World’s richest people. For all his achievements probably his greatest is helping McDonalds launch Chicken McNuggets. In the early 1980’s McDonalds were concerned that chicken prices might rise and didn’t want to risk hiking their menu prices but producers were hesitant to sell at a fixed price. Dalio went to one of the largest Chicken producers in the USA with an idea – hedging chicken feed (corn and soymeal) prices so they could quote a fixed price per chicken to McDonalds. The poultry producer locked it in and McDonalds launched the McNugget in 1983. If you need to lock in margin or make sure you quote a fixed price to your customer, then give Investec a call today to find out more about Foreign Exchange hedging.

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