Pound and Euro Volatility Likely as EU Leaders Talk Brexit, Italy

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TALKING POINTS – POUND, EURO, EU SUMMIT, BREXIT, ITALY, FOMC, US DOLLAR

  • UK CPI data unlikely to inspire a lasting response from FX markets
  • Pound and Euro volatility likely as EU leaders discuss Brexit, Italy
  • US Dollar, Yen may rise as hawkish FOMC minutes sour sentiment

UK CPI data headlines the economic calendar in European trading hours. Inflation is expected to slow, with the headline on-year rate ticking down to 2.6 percent after hitting a six-month high at 2.7 percent in the prior month. Absent an improbably dramatic deviation from forecasts, the outcome may pass with little lasting impact on the British Pound.

Market pricing envisions the next Bank of England (BOE) interest rate hike no sooner than May 2019. A recent dovish shift in implied probabilities suggests investors increasingly expect it to come later still, with August 2019 emerging as a leading candidate. That puts any policy adjustment well beyond the Brexit deadline in March 2019, implying that EU/UK divorce negotiations ought to take top billing in the near term.

EU LEADERS’ SUMMIT TO STOKE POUND, EURO VOLATILITY

This puts the spotlight squarely on the EU leaders’ summit getting underway today. UK Prime Minister Theresa May is due to present the gathering with an updated set of proposals to resolve thorny issues including the fate of the EU/UK border soon to be running across the island of Ireland. Signs of a breakthrough are likely to boost Sterling while failure to break the latest impasse will probably send it lower.

Italy may emerge as another important subject. The newly-minted eurosceptic populist/nationalist coalition government there seems to be on a collision course with regional authorities in Brussels. Rome backed away from an attempt to flout EU budget rules and a formal discussion of the situation there is not on the docket, but Euro volatility may still be triggered by sideline soundbites from top officials.

US DOLLAR, YEN MAY RISE ON HAWKISH FOMC MINUTES

Later in the day, the spotlight turns to minutes from September’s FOMC meeting. The document may reiterate the central bank’s commitment to stimulus withdrawal, pouring cold water on speculation that recent risk aversion might inspire a dovish adjustment. That might boost the US Dollar and sour sentiment anew, echoing last week’s fireworks. The perennially anti-risk Yen may also rise in this scenario.

See our forecasts for currencies, commodities and equities to learn what will drive prices in Q4!

ASIA PACIFIC TRADING SESSION

Pound and Euro Volatility Likely as EU Leaders Talk Brexit, Italy

EUROPEAN TRADING SESSION

Pound and Euro Volatility Likely as EU Leaders Talk Brexit, Italy

** All times listed in GMT. See the full economic calendar here.

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