Pound weakness spurs fighting on the supermarket aisles

The announcement late on Wednesday that Tesco would remove Unilever products from its shelves after the consumer goods company demanded a 10% price increase on everything from Marmite to dishwasher tablets is another tangible sign of the power of the weak pound. Some corners of the press are up in arms about how consumers are being held to ransom by a prominent remain campaigning corporate, however, this is what globalization is: an EU company owns quintessentially British goods such as Marmite

Unilever cutting its nose off to spite its face?

Overall, this stand off is not good for anyone, least of all Unilever, who could see reputational damage here in the UK, they are also likely to lose market share if its goods are not stocked in Tesco, and we would expect an agreement to be reached by both sides. Tesco is likely to stick to its guns, however, and play hardball with Unilever; only last week its CEO announced a new round of price reductions as part of the turnaround plan for the retail giant.

Brexit hits consumers where it hurts

The Tesco/ Unilever battle is the latest fallout from Brexit, and since the pound dipped further overnight, back below 1.22 after a hawkish tone in the minutes from the Fed’s September meting, price wars are likely to heat up. The supermarkets are likely to try and resist price increases since most of them are trying to cut prices to attract consumers. However, this episode highlights how quickly weakness in the pound can effect us all in the pocket.

The Fed gets set to raise rates

The minutes from the latest Federal Reserve meeting were released last night, the key takeaway was that three members voted for a rate hike last month, with others reluctantly sitting on the fence. The minutes noted that the decision to wait before raising rates was a “close call”, and the Fed agrees that it should raise rates “relatively soon”.

The initial market reaction to the minutes was muted, and market expectations were little changed, with a 67% chance of a rate hike in December now being priced in by Fed Fund Futures. The dollar had a mixed trading day on Wednesday, with losses against the pound, Aussie and Kiwi dollars and gains against the yen and NOK. However, Wednesday’s price action does not change our strong dollar outlook. We continue to think that GBP/USD and EUR/USD remain vulnerable in the near-term. If we manage to see some decent earnings from the US corporate sector this week, then this could boost risk sentiment and help USD/JPY to sustain further gains.

May poker face gives nothing away on Brexit

The pound was given a boost on Wednesday after the Prime Minister said that she would allow Parliament to scrutinize her plans for Brexit. However, as we learn more what this motion means, it appears that the government has merely accepted a labour proposal to “properly scrutinise government plans for Brexit before Article 50 is invoked.” This does not mean that MPs will be given a vote to decide on the plans, or to delay triggering Article 50. In fact, the government has said that it will only agree to Labour’s motion if it does not weaken the government’s negotiating position with the EU.

Thus, the debate in Parliament on Wednesday, and potentially future debates, may not give traders the detail on the UK’s Brexit plans that they so desire. In an age of social media you could argue that even the smallest leak could “damage” the government’s negotiating position, so it is likely that May and co. will keep their cards close to their chests in the coming months.

What does this mean for the pound?

Since secrecy at Whitehall is mostly GBP negative, it is no surprise that we have seen some unwinding of the GBP relief rally from Wednesday. Tuesday’s low of $1.2106 in GBPUSD is now a key level of support. We continue to believe that we will breach the $1.20 mark in GBPUSD. This could happen if Hillary Clinton wins the US Presidency next month, since it could trigger further gains in Treasury yields, which have been a key support to the US dollar in recent weeks. In contrast, a win for Trump could trigger a flight to safety, including mass buying of Treasuries, which could weigh on Treasury yields, and thus the dollar.

Watch bonds for further market direction

Interestingly, the pullback in the dollar on Wednesday was matched by a slight weakening in US Treasury yields, 10-year yields backed away from 1.8%, and settled around the 1.77% at the market close. This gave UK and German yields the chance to play catch up, with UK 10-year yields rising to a high of 1.06%, their highest level since just after the EU referendum in June. Likewise, German 10-year yields also rose a touch yesterday. Overall, the relationship between bond yields and the FX market has strengthened in recent days, so it is worth seeing where bond yields are this morning to get a handle on what the key players in the FX market may be doing.

Snapchat ain’t afraid of no rate rise…

The social media photo-sharing appb, Snapchat, is reportedly heading towards a $25 billion IPO, potentially as early as March 2017. This is interesting timing to announce an IPO, with the US election and various market jitters causing investors to take a cautious approach.

However, Snapchat is popular, and the market seems to love social media app that have no proven track record of generating revenue. Thus, we will wait to see if this can inject some confidence into the US stock market on Thursday, which is currently stuck in a tight range after failing to break above the August high, as the markets remain preoccupied with a US interest rate rise.  Earnings are also worth watching. Friday’s plethora of US bank results could set the tone for risk sentiment next week, with strong earnings likely to see treasury yields and the dollar continue to rise, alongside stocks.