Good morning,

GBP: Deal or no Deal?

Doubt around Theresa May’s ability to strike a deal on the future of the Irish border saw the pound fall on Tuesday morning. The dilemma is that there needs to be a border somewhere. Dublin doesn’t want a border on the island, the DUP doesn’t want a border with the rest of the UK however we are choosing to leave the single market and custom union so there needs to be some division somewhere. On Wednesday, May will be back in Brussels to try and end the standoff. There isn’t much UK data out so all eyes on Brussels.

While the manufacturing and construction PMIs outperformed with the service sector disappointing, fears over the growth profile of the UK economy must remain. The data shows that inflation is once again biting the businesses within the services sector and these price rises are now having to be passed on to the consumer. The consumer however is ill-equipped to deal with higher inflation for much longer and services sector companies, particularly those on the high street, may be back to discounting faster than you can say ‘margin’.

The combination of the PMIs so far in Q4 is pointing to a growth figure of around 0.4% with risks over contributions from investment and consumer spending remaining as we move into 2018. Net trade is not strong enough to pick up the slack even despite the weakness of sterling

EUR: Continuing to struggle

Another currency to fall on Tuesday was the euro after much weaker EU retail sales numbers measuring the change of sales in the Eurozone retail sector. We also had German services and manufacturing numbers out which both came in lower than expected. With Germany at the forefront of the Eurozone, the market is quick to react to any changes in the countries data.

We also have the ECB Non-monetary policy meeting on Wednesday which could bring us a surprise if there is any comment on changes to the current asset purchasing plan, especially as the market is anticipating some change imminently. This is certainly the key EU news to keep an eye on tomorrow.

AUD: GDP disappoints

The RBA’s overnight statement on Tuesday morning was more upbeat than expected. Despite several poor months of currency performance, and the cash rates being left at 1.5%, the overall positive commentary triggered bets for a March 2019 rate hike.

We now look for signals that there has been a successful turn in the employment sector which will compliment rising inflation and drive interest rates higher. Also worth noting that Chinese PMI for November beat expectation, which helped to push the dollar along.

Overnight, Aussie GDP has missed expectations and AUD collapsed, not unlike the England cricket team. AUDUSD is down 0.25% so far this morning.

USD: Taking advantage

Tuesday confirmed a second day of successful USD strength as the US tax reform took shape. Despite differences of opinion from the Senate and House of Representatives, a deal looks certain to go to a vote in the New Year.

On the other side of the coin, service sector activity dropped during its November reading – 57.4 vs 60.1 expected. Despite the low print, it is the 95th successive month of expansion in the service sector, something other economies will be pining over. EURUSD took advantage of the situation and broke lower, and looks headed for the high 1.17s.

Have a great day

Jeremy Cook, Chief Economist