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Research Market strategy
by Swissquote Analysts
Daily Market Brief

GBP better bid as Brexit bill passes first test

GBP edges higher ahead of inflation data

By Arnaud Masset

UK August inflation gauge is due for release alter today and is expected to have accelerated further in August. The consumer price index should print at 2.8%y/y, reflection both rising fuel price and a weak pound sterling. The core gauge, which excludes the most volatile components, should also overshoot the BoE target of 2% (median forecast of 2.5%y/y).

Given the fact the BoE made clear it is ready to tolerate higher inflations level as the negative effects of the Brexit are still to come, it is unlikely that the pound sterling appreciates sharply should inflation accelerates more than expected. Similarly, a disappointing reading won’t trigger a sell-off in the pound as it will only bring the gauges closer to the BoE’s target.

On the political side, Theresa May’s Brexit bill made an advance yesterday as lawmakers approved her bill, which is aiming at repealing the 1972 European Communities Act. This is just the beginning of May’s long journey to take Britain out of the EU.

The pound sterling was trading broadly higher on Tuesday morning amid an improving overall risk sentiment. The cable was up 0.20% to 1.3190 and getting closer to the next resistance that lies at 1.3267 (high from August 3rd). The pound rose the most against the Japanese yen as the pair rose 0.225% to 144.42.

ECB: Vice President Constancio set to speak

By Yann Quelenn

A week after the ECB meeting where the rates remained unchanged, ECB Vice President Constancio is going to hold a speech in Frankfurt. It is worth betting that most of the discussion will be around the Eurozone inflation and in particular the ECB difficulties to boost consumer prices.

Early September, Constancio already mentioned that the lack of inflation is set to persist in particular due to economic difficulties of the United States and geopolitical risks that should weigh on the global economic conditions. One could also say that massive QE does not have the expected results.

Most of the European government bonds in the front end of the yield curve are now trading a negative interest rate and it has been a while since investors are trading bonds for capital appreciation rather than yields because of free money. All of that is underpinning low inflation. Markets expect normalisation and higher asset yields but when the ECB removes it stimulus, good chances are that it could trigger massive losses in different asset classes.

Rumours are that the ECB said should be ready, at the next meeting late October, to reduce their massive asset purchase program from 60 billion euros a month to 20 or 40 billion euros a month. Markets are still largely bullish on the euro even though we do believe that markets are overly optimistic regarding the European Central Bank, for now.

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