GBP outperformance continues as EU – UK close in on Brexit deal; USD weakens on soft US retail sales, EUR firms on fiscal stimulus talk

GBP outperformance continues as EU – UK close in on Brexit deal; USD weakens on soft US retail sales, EUR firms on fiscal stimulus talk      

• GBP: Brexit optimism continues with Reuters headlines adding to confidence as GBPUSD hits a high of 1.2886 before retreating modestly. Key headlines so far – (1) Lawmakers say there is a sense of relief in the room that we are almost there on Brexit deal; (2) Conservative MPs in the room say PM Johnson has told them the Summit is shrouded in cloud but we are almost there; (3) Level playing field, customs arrangements, Northern Irish consent all agreed in EU – UK talks; (4) UK lawmaker Baker says PM Johnson is “categorical” UK will say in one customs area (including Northern Ireland); (5) UK Conservative lawmaker Steve Baker says deal sounds like it could be tolerable; and (6) UK lawmaker Baker says until there is a legal text, Euro sceptics will not make a decision on whether to back it. However, should EU – UK agree to the Brexit proposal, a second and equally difficult hurdle remains for the UK parliament to pass the deal at its sitting this Saturday.             

• EUR: Unsourced headlines on Bloomberg overnight note “Germany’s CDU is softening its opposition to fiscal stimulus and that the CDU caucus may drop its balanced budget goal if a downturn deepens”. Reuters also outlines comments by German Finance Minister Scholz, in which he says "Germany intends to stick to its balanced budget rules for now and boost spending without incurring new debt, but adding the government would use all fiscal options in a severe economic crisis."               

• USD: US retail sales – weak enough for October Fed cut, but not enough to change outlook - US September retail sales disappoint with total sales declining -0.3%MoM (vs +0.3% expected), core sales down -0.1% (vs +0.2% expected) and sales in the retail control group flat (vs +0.3% expected). Citi analysts are not surprised to see some moderation in September data following a multi-month period of exceptional strength (now extending through August following upward-revisions) and market reaction is, accordingly, also fairly muted. Still, the unexpected weakness compounds downside risks and makes more probable an already-likely rate cut at the October 30th FOMC.    

• USD: Fed speak overnight sees Evans who still “sees an argument for more accommodation now as insurance” but will keep an open mind while Kaplan is “more agnostic” on October after already having backed two rate cuts. He will “take a little time” to see how things unfold. For the remainder of this week, US data includes US industrial production (Citi analysts expect -0.1%MM vs consensus -0.2%) and manufacturing production to likely decline -0.3%MoM.           

EUR: Firmer on German fiscal policy chatter, hawkish ECB speak             

• EUR: ECB hawks continue to reiterate concerns, wanting a review of monetary policy strategy with Austria’s Holzmann arguing that negative rates are (1) the “wrong approach”, (2) put banks, insurers and pension funds at risk and that he wants “a debate about whether the approach that was pursued in the last 10 years is rational or needs to be replaced”. Dutch central banker and ECB council member notes Klass Knot indicates “it's true in any case that there is going to be a need for a review of ECB policy, and I think everybody is convinced of that by now".        

GBP: Brexit yet to cross a 2nd hurdle should UK – EU agree to deal; UK core CPI rebounds, echoing resilient wages data     

• GBP: A big hurdle may be close to being crossed should the EU summit endorse the UK Brexit proposal on Friday but yet another hurdle still remains - UK parliament sitting on October 19 to debate and pass the Brexit deal. What is needed to pass the deal in the UK parliament? – (1) Boris Johnson will need the support of the DUP, the hard – core Brexiteers within the Tory Party and the 21 rebel Conservatives, dismissed after Theresa May stood down as PM (Boris Johnson has indicated there may be a path back for the ex-Conservatives if they back the Brexit deal). (2) But even if all Conservatives (and ex-Conservatives) plus the DUP vote for the Brexit deal, they would will still likely fall short as Boris Johnson currently rules in a minority government, meaning that he will need at least 10 – 20 members of the opposition to vote for the deal as well.

• GBP: UK CPI inflation, targeted by the BoE, comes in steady in September at 1.7% YY (consensus 1.8%) compared to 1.7% YY in August and compared to 2.0% on average over Q2. Meanwhile, core CPI rebounds to 1.7% YY (consensus 1.7% YY) compared to 1.5% YY in August. Overall, Citi analysts still expect the MPC to likely hold rates steady for now, given uncertainty caused by Brexit so far.     

Commodity bloc: Stronger NZ CPI but RBNZ signals a November cut; At-target core CPI measures to keep BoC on hold       

• NZD: A roller coaster ride over the past 24 hours, testing a high of 0.6322 following the NZ Q3 CPI beat yesterday (0.7%QoQ versus consensus at 0.6%QoQ and 1.5% YoY versus 1.4% consensus) but meeting with sellers following dovish speak from RBNZ Deputy Governor Bascand saying “the RBNZ is wary of potential challenges" and "there's a reasonable prospect of another rate cut." Though a further 25bp rate cut at the RBNZ's November 12 meeting remains fully discounted, NZD looks vulnerable on crosses (Euro bloc – versus GBP; Commodity Bloc – versus both AUD & CAD).    

• CAD: Meanwhile, Canadian CPI underwhelms with headline CPI in September declining 0.4%MoM, slightly more than consensus expectations for a 0.2% decline (1.9% versus 2.1% expected) while all of the BoC’s three core inflation measures increase (the trim measure rises to 2.1% from a downwardly revised 2.0%). Although the BoC will be cautious given downside external risks, consistently at, or slightly-above 2% average core CPI should keep the BoC confident in leaving rates unchanged at least through the end of this year and into 2020.       

This is an extract from the Daily Currency Update, dated October 17, 2019. Please approach a Citigold Relationship Manager if you would like more information.