US shutdown looks set to end as GBP falls, USD is range-bound and markets recover

The arrival of Thanksgiving and it’s convivial atmosphere might have brought the US-government shutdown to an end! Some Democrats are ready to back a proposed compromise bill in the Senate, even though it is far from meeting the full Democratic demands of a delay in the end of Obamacare healthcare subsidies. Though a clear ‘political’ positive, the news might be different FX-wise. Some argue that it will be a risk-on, USD-negative impulse, but its impact may be more mixed. Late last week, the US Dollar (USD) was under pressure due to job layoffs and rhetoric that the US economy could contract in the fourth quarter should the shutdown extend.

At the same time, Friday's release of poor US consumer sentiment data was read as a dollar negative, in addition to Donald Trump's attacks on the Fed's independence and his demands for lower interest rates.

The probability of a December 25bp Fed cut has dropped to 64%. In case of a continued US data drought, that probability may drop close to 50% as Fed speakers generally point to the need to ‘go slow’ in cutting rates.

GBP: Sterling trades cautiously, and analysts shifted their stance towards the December policy meeting and expect the BoE to cut interest rates by 25 basis points (bps) to 3.75%. BoE dovish expectations have been prompted due to a change in the central bank’s language on the monetary policy guidance. In the last week’s monetary policy announcement, the BoE held its interest rates steady at 4%.

GBP/EUR at the bottom of recent rages at 1.1400 and GBP/USD held in a 1.3000 - 1.3200 range.

EURO:  As a result of all US-related uncertainty, it is complex for analysts to from concrete expectations of EUR/USD or GBP/USD. Though regarding their bilateral relationship, EUR/GBP may appreciate - the Euro could gain on a cautious ECB policy outlook, while GBP may weaken as expectations grow for a BoE rate cut in December. These dynamics could hold for a bit, as both ECB and BoE seem reluctant to changing rates.

ECB’s VP Guindos noted that services and wages in the EU are moving in the right direction, inflation is nearing the 2% target, and while growth remains positive, it is still modest. Meanwhile, ECB policymaker Francois Villeroy de Galhau emphasized the need to keep policy options ‘open’.

Elsewhere: USD/JPY is pushing over 154 again, and the prospect of a December Bank of Japan rate hike is being swamped by the use of the yen as a funding currency. Over the weekend, Chinese inflation figures were published and showed a slight surprise on the upside. In this case, however, this should be seen as positive – because while the rest of the world is struggling with inflation that tends to be too high, China is still on the brink of deflation. Consumer price inflation surprised on the upside at 0.2% year-on-year, compared with a 0.1% decline expected according to a Bloomberg survey.

Tuesday:
NZD: Inflation Expectations Data
GBP: Employment Data
EUR: Lagarde’s Speech

Wednesday:
EUR: Germany Consumer Data

Thursday:
AUD: Employment Data
GBP: GDP Data
USD: Price Data

Friday:
CNY: Production & Sales Data
EUR: European GDP Data
USD: Price & Sales Data

Next Monday: Japan’s GDP and Canadian Consumer Price Index