Pound grinds higher after May’s cabinet backs her Brexit plan

Summary:

• Theresa May’s Brexit plan was backed by her cabinet opening the way for a special summit later this month

• US dollar declines following remarks from Fed’s Powell

• Australian dollar rallies as jobs report beats estimates

Brexit deal in sight

The cabinet of PM Theresa May voted in favour of her Brexit plan on Wednesday offering the green light to hold a special summit later this month (November 25 seems the be the likely date). As a result, the British pound saw choppy trading as we were simultaneously offered rumours regarding ministerial resignations - none of them turned out true as of yet. Is the pound already out of the woods? Not exactly. During the special summit in the end of November the approved deal will be officially backed by the European Union before it is brought back to the UK parliament for a crucial vote - this one is likely to be held in December. Therefore, it does not look like the ultimate end of all woes for the pound as the UK parliament could vote the Brexit deal down. Hence, everything is already in the hands of Theresa May to persuade the parliament to follow suit and back her 585-page divorce deal. If the parliament rejects the deal, it would result in increased odds that the UK will leave the block without any agreement or it will not leave the EU at all. To sum up, even as the yesterday’s voting has got rid of some of uncertainty, it is still a long way before Theresa May may claim a victory, therefore the pound could experience heightened volatility in the nearest few weeks. Anyway, the GBPUSD keeps trading within its broader range between 1.27 and 1.33 (currently slightly above 1.3020) and leaving the area could be possible until the end of the year and will hinge on what happens next in the May’s plan.

Crucial levels to watch in the GBPUSD market. The market could leave the consolidation before the year end but the direction will depend on incoming Brexit developments. Keep in mind, the pound is one of the most undervalued major currency. Source: xStation5

Each meeting is now 'live'

Looking around the FX market in the morning one may notice that the US dollar is suffering and is trading lower against all its major peers. Some of its underperformance could be ascribed to a Powell’s speech as he said that the US economy is strong but could face headwinds as soon as next year. Moreover, Powell added that markets will have to get used to the idea that the central bank could raise rates any time starting in 2019. Note that since the new year the Federal Reserve will hold a press conference after each meeting, macroeconomic projections will be released on a quarterly basis though. Alluding to recent turmoil across financial markets he admitted that it matters but the main focus is on the real economy. This is another line underlining that Jerome Powell and the FOMC is unlikely to stop hiking rates due to short-term swings in the financial market. He also said that the current economic state is in part due to monetary policy conducted by the Federal Reserve. Referring to the path of future rate hikes Jerome Powell said “I think the way we will be approaching that is to be looking really carefully at how the markets and the economy and business contacts will be reacting to our policy.”

The US dollar index has failed to break above 97.50 and it is possible that it will head lower in the weeks to come. Source: xStation5

Australian labour market thrives

Last but not least, the Australian dollar is leading the gains in early European trading following a stunning jobs release for October. It showed employment grew 32.8k easily beating the consensus of 20k. Moreover, the details turned out to be yet more encouraging as an employment increase was fully steered by full-time jobs producing 42.3k while part-time jobs shrank 9.5k. On top of that, the unemployment rate held steady at 5% (the consensus had expected a rise to 5.1%) despite a rise in the labour force participation rate by 0.1 percentage point to 65.6%. Although the release was really strong and the overall trend in the Australian labour market looks great, it does not change the view as regards monetary policy there. The first rate hike is not priced in until the end of 2019 and looking at trends in price growth it still seems to be the early date to see the onset of rate hikes.

Despite the steady decline in the unemployment rate, the underemployed rate has not seen the similar move suggesting that the labour market has lacked a qualitative improvement as of yet. Source: Macrobond, XTB Research

In the other news:

• US indices ended the yesterday session lower with the NASDAQ (US100) being afflicted the most (-0.9%), stocks in China are higher this morning in Europe

• Australian inflation expectations dropped to 3.6% from 4% in November suggesting no immediate need for higher rates

• China’s new home prices increased 8.6% YoY in October

• Car registrations in the European Union declined 7.3% YoY in October