Good morning,

GBP: Only a negative number could save borrowers from higher rates

Sterling had one of those days yesterday wherein, on little news flow, it rumbled lower against all currencies in the afternoon session. Some analysts have ascribed it to the decision of Phillip Hammond to rule out borrowing money to invest in the housing market as a symbol of further low growth expectations in the wider UK economy. Others have jumped on the words of Bank of England Deputy Governor John Cunliffe who reiterated that the timing of a rate rise in UK was an ‘open question’ and that the UK economy has ‘clearly slowed this year’.

The recent weakness in the UK economic data and comments from Monetary Policy Committee members Ramsden and Cunliffe have not been enough to change our belief that interest rates will rise a week tomorrow but that the unanimity is drifting out of the decision. We now think that both members Ramsden and Cunliffe will vote to hold rates as is in November. Such a result would not change our calls for sterling to end the day lower following the rate rise although it should limit the sterling positivity that the immediate announcement provokes.

Today’s GDP release is the preliminary look at how much the UK economy grew in the 3rd quarter. Our expectations are that the economy will have been shown to have grown by 0.3% on the quarter, matching growth in Q1 and Q2. A figure of 0.1% or below would be enough to inject some caution into sterling markets ahead of next week’s run of PMIs and the Bank of England meeting but I think we would have to see a negative number; i.e. an indication that the UK economy shrank for real doubts to emerge on whether the BOE will hike on Super Thursday.

GDP will be released at 09.30 BST. .

CNH/CNY: Strengthening grip on power

The ongoing Chinese Congress saw Chinese President Xi unveil a new leadership line-up that includes no obvious heirs, diverging from a 25 year old succession system in China and raising the chances that he might seek to stay in office beyond 2022. The system calls unofficially for the Chinese Premier to retire by 68, XI is 69 and will for all intents and purposes is looking to extend his reign into his 70s.

CNY has remained quiet on the official exchanges with CNH also remaining indolent.

USD: Show me those hands

A meeting of Senate Republicans yesterday reportedly saw President Trump ask for a show of hands for various candidates for the Federal Reserve Chairmanship. According to one Senator, Professor Taylor whose eponymous rule outlines a calculation for where interest rates should be based on inflation, growth and unemployment, was said to have won although others said the voting was not seriously done.

USD has run higher in the Asian session as a result. We expect a concrete announcement from the White House in the next 10 days.

The Day Ahead

Ahead of tomorrow’s crucial European Central Bank meeting we will be watching the single currency for any signs of a leak of the Executive Council’s thinking. We expect that QE will be cut in half (from EUR60bn a month to EUR30bn) for the next nine months and that language will make it clear that the interest rate rises will not occur until QE has been completely halted.

Have a great day

Jeremy Cook, Chief Economist