Weale’s Comments The Biggest Mover For Sterling

With a lack of new information out on Friday or today, the main mover for sterling was a comment from the Bank of England member Martin Weale. He commented that even if inflation was close to target, we should keep rates unchanged until all spare capacity is used. GBPUSD broke to recent highs which potentially signals a further move higher to test the recent highs of 1.6250.

A slight blow was dealt to sterling, however, as the Rightmove house price survey showed an unexpected fall by 2.4% month on month in November. The November MPC minutes will likely provide the highlight of the UK calendar this week, as further guidance is sought on the thoughts of the voting members following the inflation report and recent data. That said, the quarterly inflation report last week covered much of the reasoning behind the Bank’s current stance, so there might not be too many surprises. The minutes are likely to deliver a message including the latest shifts in projections for GDP, inflation and unemployment, which should be supportive of GBP.

The data that finished the week for the US was poorer than expected, with the Empire manufacturing survey showing a decline to -2.2 from the +5 expected. Import prices and inflation were also lower than expected, at -0.7% and -0.1% respectively month on month, and adding to concerns over the impact of the government shutdown on the wider economy.

This week’s data from the US will provide further information on the strength of the housing market. Recent developments in the housing market have been of some concern, with mortgage applications falling off recently as rates have moved higher. Despite this, there are still reasons to expect housing activity to improve, with affordability still relatively high, house prices going up and mortgages becoming easier to obtain.

Today’s homebuilders (NAHB) index for November will likely rise modestly but this is partly because it fell significantly in October; it will still be below its level in September. Later in the week, October existing home sales data will likely show a second consecutive monthly fall in sales.

The euro has basically recovered since the European Central Bank surprised markets with a 0.25% rate cut. The final CPI inflation rate from Friday of 0.7% year on year justifies the banks decision to cut rates, and underlines the banks exceptionally loose monetary policy stance. Risks remain that the ECB could announce further measures, with another long term refinancing still quite possible, which would be expected to weaken the Euro.

November flash PMI will be the main focus this week with a marginal improvement expected after sentiment fell slightly in October. Given the generally weak data, markets are expecting similarly weak incoming data, so signs of resiliency will provide the market with an excuse for further gains.

Following up on last year’s easing, the Reserve Bank of Australia has already cut its policy interest rate twice this year, taking it to an all-time low of 2.5%. However, since August, policy has been on hold as the impact of previous moves is assessed with no action again in November. Minutes from that meeting, out early tomorrow, will likely repeat the message of the press statement that the RBA is in wait-and-see mode for now, while it assesses the impact of previous rate cuts but a bias toward further easing is maintained.