Brexit sensitivities will continue to provide the driving elements for the pound as markets continue to seek an understanding of just what Brexit will mean. The wait to best understand which direction Brexit will take continues in November, but with no real deadlines on the horizon, Sterling might find difficulty in receiving too much positive attention. The next EU Summit is in December so with no actual specific event to focus on, the performance of the pound is likely to remain linked to any news and headlines.
Theresa Mays position as Prime Minister will continue to be questioned but she is hanging in there despite increasing calls for her to go. One of the most difficult challenges is who would replace her? Whilst many Conservative MPs disagree with her approach on Brexit, would they really risk losing power over it? The twists and turns on this important topic will be a key feature in November and it is difficult to see where the Pound will easily find significant strength.
Economic news will now take more precedence in a month when politics remains vital but there is a lack of events of significance. Calls for a second Referendum may also gather pace in November with the Independent newspaper and their online petition receiving 1m signatures.
Important economic data kicks off straight away with the 1st November Bank of England interest rate decision and Quarterly Inflation Report at 12:00 and 12:30. Mark Carney often talks about Brexit concerns weighing on the UK economy and this could be a challenge for the pound early on in the month. Other important data will be Friday 9th GDP, Gross Domestic Product data and Tuesday 13th Unemployment data, as well as the Wednesday 14th Inflation figures.
Ultimately, it is extremely likely that the latest news on Brexit will keep the pound driven, which will remain very sensitive to any sudden changes in sentiment. A continued lack of direction may see the pound gently ebbing lower against its counterparts. Any sudden news of positive progress on Brexit could help the pound to rise higher but it does seem for sterling holders the risks remain to the downside.
Politics and Italian debt have been the key issues for the euro and November could see a further unravelling on this major topic.
Italys new coalition government have set a new budget that whilst within Eurozone spending rules, does represent more of a borrowing and spend approach, that has worried investors. The EU has rejected the budget and in November we will find out how Italy plans to respond to this, so far they say they will ignore the demands.
The cost of Italian borrowing has gone up on the concerns and Italys economy has been downgraded by ratings agencies, piling more pressure on the country and the euro. The ECB were notably nonchalant in their assessment of not just Italy but also the outlook economically in the wider Eurozone, is their confidence misplaced?
Monetary policy from the ECB who had been in a process of looking to raise interest rates in 2019 and end their Quantitative Easing plan for 2018 could easily stall if further concerns mount over the direction of the Eurozone economy. I feel the ECB have been too optimistic and I am slightly concerned about the direction the Italian debt situation might take.
Important economic news is the Friday 16th Inflation data, 14th GDP data and Friday 30th Unemployment data. Some indicators have pointed to slowing growth so economic news released will be scrutinised. The euro has done fairly well in 2018 but economic concerns and worries over political situations in Italy and now also Germany could see the currency weaken.
Interbank GBP/EUR rates slipped on Brexit uncertainties falling from near 1.15 to the 1.12s in October and whilst November no longer holds any deadline dates on Brexit, it could be a choppy period as the market tries to gauge the direction for Brexit. A deal on the UKs exit terms is now less of a possibility.
Given that the Euro may also come under pressure we could see some volatile direction on GBP/EUR levels owing to the uncertain nature and large potential for either issue, Italian debt concerns or Brexit to trigger sharp movements. It is quite difficult to see where significant strength for the pound will emanate from, unless there is progress made on the Irish border. The pound therefore looks set to struggle with concerns over Italian debt problems acting as a balance and counteracting direction on the pair.
I think the pound to euro rate could remain between the 1.11-1.15 interbank range as the market awaits that key piece of information on Brexit to move higher. GBP/EUR rates have remained volatile but in a tight range of 5 cents since May. The lack of any firm timetable of events leaves the door open to a turbulent period on GBP/EUR levels.
The US dollar is benefitting from improved confidence in the US economy, which continues to steam ahead and frame the US dollar as the top choice of investment from a currency traders perspective. Not only is the outlook still strong economically, interest rates are very high in the US which provides investors with a stable return. The Trade Wars are having no major obvious negative effects so far on the US economy so investors confidence is high at present.
The US is much further ahead in the economic cycle and the economy is showing no signs of slowing down, recent GDP growth was 3.5% for July to September. What investors will be eyeing up ahead is the likelihood of when there will be a defined turning point and when the US economy might have reached a peak. Economic data released early in the month is Non-Farm Payroll and Unemployment data figures on Friday 2nd November. This is a key date as one of the reasons the US Federal Reserve will consider to raise interest rates.
Interest rates are expected to be raised again in December and whilst any deviation in this belief could be a market mover, it will be the tone regarding further hikes which will attract the most attention at the next meeting, due on November 9th. It is possible that the US dollar will be volatile surrounding this release but the general sentiment could be positive for the US dollar to remain strong in November.
This is also because of more global factors including the worries in the Eurozone which have seen the Euro weaken and helped improve the attractiveness of the greenback. Whilst the US economy is not free from issues, global financial markets are concerned at just how events in Europe, including the Italian debt crisis and Brexit will pan out. This may be another factor giving the US dollar strength in November.
The Pound to US dollar rate has slipped following the concerns over Brexit, which have seen Sterling lose value across the board. Increased expectations of a deal being reached on Brexit appear to have faltered which has seen the Pound losing value, and with no real deadlines on Brexit in November, the Pound looks likely to remain the weaker of the pairing.
I expect the interbank levels to remain in the very high 1.28s with a real possibility of testing the 1.26 lows which we saw only a few weeks ago. A key factor holding back progress on Brexit is the Irish border issue which could provide the key to unlocking gains for the Pound. There are no scheduled major Brexit events in November so Sterling could remain weaker due to a lack of progress. Any surprises could see us back over 1.30 but my general expectation is sterling may continue to find difficulties in capitalising against the US dollar in November.
The Australian dollar has been weaker in recent weeks as Trade War concerns weigh on the currency and its biggest trading partner, China. Expectations are for a volatile period ahead as the market feels that China continues to be the worse off from the trade spat with the USA.
The Australian dollar has also lost some ground in recent weeks as the market loses faith over the likelihood of the RBA, Reserve Bank of Australia, to raise interest rate in the future. Whilst there is an expectation this is the longer-term goal of the Australian central bank, it does appear it will have to keep getting pushed back.
Interest rates are key point of discussion on the Aussie too since the US, having a much higher base rate is now a much more attractive currency to be holding. As US interest rates are expected to rise even higher than Australian interest rates, the divergence between the AUD and USD will increase which will ‘drag the Aussie lower against its counterparts too.
Key news on the Australian dollar will be the Australian Interest Rate decision on Tuesday 6th, where we will learn the latest news and sentiments relating to the economic outlook. The likelihood of the Australian dollar rising higher could increase following this meeting, but the general impression is the weakness in the Australian economy will prevent any major advances. Essentially a lack of wage growth and highly indebted consumers is a concern for the RBA.
With the market firmly focused on whether or not the Trade Wars will continue to negatively impact the Australian economy, the likelihood appears to be a weaker Australian dollar as global tensions remain and investors avoid backing the currency too much, particularly when there is the higher yielding US dollar offering more security.
GBP/AUD levels could dip below 1.80 any day now as Brexit uncertainties keep the pound in the doldrums. Expectations for the pound to rise centre around progress on Brexit, which does not appear too forthcoming and is linked to progress on the currently unsolvable issue of the Irish border. The pound may find its way back in the higher 1.70s against the Aussie but any deterioration in the Trade Wars or other global issues which impact US interest rates will influence the GBP/AUD levels.
It seems clients buying Australian dollars with pounds would do well to capitalise on any improvements, as the general trend appears to be one of a weaker pound. The weakness in the Australian dollar will to a degree present opportunities but it does feel the uncertainties over Brexit will weigh more on the pairing than the more global factors driving the Aussie.
For up-to-date information on the factors that are affecting exchange rates this month, download our latest monthly currency forecast.
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