Sterling was mostly lower versus its G10 peers last week, suffering from several set-backs, including significantly weaker than expected retail sales (falling 0.8%) along with a mixed jobs and earnings update.
CPI was in line with consensus, coming in at 3 percent year on year, hitting a 5 year high in the process.
On a positive note, a combination of better than forecast UK public finance data and signs of progress on the Brexit front helped Sterling recover some of the lost ground towards the end of last week.
Focus will turn to the potential Bank of England interest rate hike next Thursday, the first in 10 years. Robert Wood, chief economist at Bank of America expects a rate hike on November 2nd not because of the data, but because of what rate setters said last month.
The Monetary Policy Committee at the Bank of England said that it could withdraw stimulus from the market over the coming months if inflation continued to head north of its 2 percent target and the economy remained on an even keel.
Markets are now showing more than an 80 percent chance of an interest rate hike next week.
For the week, the Pound lost 0.7 percent versus the Dollar and 0.4 percent versus the Euro but gained 0.8 percent versus the Yen.
The Euro was mostly higher versus its peers last week as attention switched towards the next European Central Bank meeting on Thursday and expectations of the central bank tapering.
However, the Catalonia-Spain saga remained a persistent and fluid influence on direction as Madrid looked set to trigger Article 155 (providing Spain the power to seize back power from Catalonia) following the failure by the regional president to meet an independence deadline.
German Chancellor Angela Merkel gave Theresa May a Brexit boost as EU leaders gathered for a summit in Brussels, saying there were “encouraging” signs that talks on the future UK/EU trade relationship could begin as early as December.
Britain had already given up hope of receiving a green light for trade talks at the two-day European Council, after chief EU negotiator Michel Barnier said last week that insufficient progress had been made in divorce talks to move on to the second phase, dealing with trade.
The US Dollar ended last week higher, largely on the Senate’s approval of the 2018 budget resolution, which bodes well for US President Trump’s tax reform proposals.
News that Powell and Taylor were front-runners to replace Janet Yellen as Fed Chairman in 2018 also buoyed the Dollar.
The Japanese Yen was softer last week, with the prevalent risk-on environment seen weighing on the Japanese currency’s safe-haven demand.
The Nikkei posted its longest winning streak since 1961 on hopes that Japanese Prime Minister Shinzo Abe’s ruling coalition would win Sunday’s general election. Also weighing on the Yen was Japanese industrial production which rose by less than estimated in August.
As a traditional safe-haven, the Swiss Franc had a difficult time finding demand last week as global stocks continued to hit new record highs.
Domestic data was largely shrugged off, with trade surplus climbing to CHF2.9 billion in September from CHF2.2 billion in August.
The Australian Dollar slipped following the net Aussie bearish China docket, as the Chinese economy’s Q3 GDP print materialized fears of an economic slowdown.
Domestically, the September jobs report showed a few bright spots. We also saw the RBA’s October meeting minutes, though the underlying content revealed no marked shift in the central bank’s stance of policy inaction for the near future.
The Canadian dollar fell last week on the back of benign inflation data and dire retail sales, just ahead of this week’s Bank of Canada policy meeting. The Central Bank is widely expected to maintain rates, and Friday’s CPI and consumption reports should only cement the on-hold view.
NEW ZEALAND DOLLAR
The New Zealand dollar underperformed all majors last week after the New Zealand opposition Labour Party gained enough support to form a new government, increasing uncertainty in regard to central bank and immigration policies moving forward.
The Swedish Krona saw a modest softening last week. The bulk of decline came after Sweden’s unemployment rate climbed to 6.2 percent in September from 6 percent in August.
Looking ahead, we believe that the Riksbank meeting on Thursday could turn out to be quite unexciting and we expect both the inflation forecast and repo rate forecast to be kept intact.
The Norwegian Krone fell last week, despite a weekly gain of nearly one-percent for US crude futures and a notable increase in the trade surplus in September from a year ago.
Looking ahead, we do not expect any changes to interest rates at Norges Bank’s meeting on Thursday.