GBP: Quiet into Christmas?
It would be difficult for the UK to have a more tumultuous political week than it did last week, with events conspiring to take the pound to a 20 month low against the US dollar and leave it somewhat adrift as we head into the Christmas downing of tools. We expect unease to surround the pound until parliament goes into recess on Friday; both the government and the Labour party have announced that they are unlikely to move their respective votes on the Brexit plan or confidence in the UK government before Christmas.
Part of the weakness, however, was the sudden pulling of the government’s vote; political communications can pull the rug out from under a currency, especially in such a climate of distrust.
As we wrote in this morning’s daily update, the economic data which previously had been underpinning some of the pound’s strength will come back into focus. Friday’s GDP figure is unlikely to be listening that close to Christmas – but Wednesday’s inflation and Thursday’s retail sales numbers will make for interesting reading.
We do not expect inflation to support sterling – November will likely have seen strong discounting – and while Brexit remains as poised as it is, nobody is seriously talking about inflation driven interest rate hikes. Similarly, the retail sales numbers will be a strange one given they are for November and are therefore distorted by the mess that is Black Friday. However, this morning’s news from the online retailer, ASOS, could be a sign of negative things to come.
USD: December hike but what for 2019?
Away from the clown car that is Brexit, the most important thing in markets this week is the Federal Reserve’s December meeting. As always, the movement of interest rates is not the most important thing but instead, the dollar will be focusing on the economic projections, the tone of the press conference, and, unfortunately, the reaction on President Trump’s Twitter feed.
The atmosphere around this meeting has been one of weakness in the global economy and a slowing of US growth that may be enough to stay the Fed’s hand from its own forecasts of another three interest hikes in 2019; markets are only pricing in one. If Powell and the Fed deliver that message then the dollar will likely end the year on the back foot. A stubborn Federal Reserve could be enough to drag the dollar back higher.
The Federal Reserve meeting is this Wednesday at 7pm GMT with the press conference thirty minutes afterwards.
EUR: Italy can offer hope
This week’s and last’s good news from Italy was overshadowed by the continual discord in France and that was enough to keep the single currency from driving too much higher.
Reports over the weekend suggesting that the Italian political leadership have come to an agreement on a new Budget plan have given the single currency a little positivity this morning. This decision comes only a few days before Italy was due to meet European Commission officials and possibly be subject to sanctions.
European inflation numbers are due this morning following Thursday’s European Central Bank meeting which saw a mixed inflation outlook and lower growth forecasts coming into 2019.
CNY: Speeches and planning
President Xi makes a speech on Tuesday and will open the Central Economics Work Conference on Wednesday, a meeting that will set out plans for the wider Chinese economy through into 2019. 2018 has not been an easy year and we expect President Xi to outline plans for further reforms to the Chinese economy as well as hinting at a lowering of the growth target alongside additional stimulus.
Given the antagonism around tariffs and trade and the likelihood that stimulus is needed in China sooner rather than later, we maintain our belief that the yuan will creep towards 7.00 in the coming months.
JPY: If concerns rise, so will the yen
We expect JPY to end the year quietly – we see no need for investors to hump into the yen as a haven from particular market discord. The Bank of Japan’s last monetary policy meeting of the year is due this week and, while no policy change is expected, concerns around US-China trade issues and global growth slowdown will keep the JPY in focus.
AUD: Minutes to keep things on track
This week will see the publication of the minutes from this month’s Reserve Bank of Australia meeting. The RBA held its cash rate at 1.5% at its December policy meeting and we expect that the language around the next rate movement to confirm that it will be upwards as opposed to downwards.
Any accompanying notes on China or global trade will be interesting as well.
SGD: Watch the Fed
Singapore will be incredibly quiet this week with the majority of any movement in the currency coming as a result of the US’s Federal Reserve meeting this Wednesday.
This will be our last weekly update of 2018 with coverage restarting on January 7th.
Have a great Christmas and a very happy new year.