The euro had no problem staying ahead of the British pound this week. It picked up a cent and a quarter on the week, extending its post-referendum gain to 11%. Sterling was in trouble again as the Brexit monster was reported to be emerging from its lair. As in the last three months there were no actual sightings but the rumour mill was churning with talk of a "hard Brexit" and the chancellor was said to have given up hope of remaining in the EU's single market.
Last Thursdays better than expected UK retail sales figures were overshadowed by the release of the Bank of England’s Monetary Policy Committee meeting minutes on Friday: in which they stated that "a majority of members expect to support a further cut" if warranted by economic conditions. Already on the ropes the pound was dealt an knockout blow when it was reported that chancellor Philip Hammond had conceded Britain's membership of the single market would be inconsistent with immigration controls and EU president Donald Tusk said Britain's exit process will begin in January or February. With old Brexit inflicted wounds reopened, sterling supporters were quick to abandon its side.
It was not such a good week for the euro on other fronts and it ended up with an average loss of -1% against the other dozen most actively-traded currencies. It lost half a US cent, partly because the Federal Reserve decided not to increase dollar interest rates. The prospect of low rates for longer reduced investors' appetite for safe-havens such as the euro and the Swiss franc.
Federal Reserve policy-makers were split 7-3 in favour of keeping US interest rates on hold at 0.5% on Wednesday evening, having increased them for the first time in nearly a decade last December – three officials opposing the decision equated to the most dissent since December 2014. However, minutes from the central banks September meeting revealed that the Fed committee believe ‘…the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.' Hopes were immediately raised that the rate could be increased again this December, although this may be wishful thinking given the small matter of a presidential election in November.
Next week in the eurozone attention will be firmly focused on Mario Draghi. The President of the European Central Bank will take the stand on Monday and Wednesday, during which time investors will be listening intently for any signals that the bank will add fresh stimulus. The most notable data release in the region occurs on Friday when the YoY Consumer price Index data is delivered.
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