Carney and Hammond paint a bleak picture
Philip Hammond presented a UK Government forecast confirming that the GDP outlook would be lower under the proposed Brexit deal, but no-deal would be significantly worse for the economy compared with staying within the EU. Sterling made up some lost ground on increased speculation that Labour might push for a second referendum if the proposed Brexit deal is defeated in parliament. The Pound initially failed to move above 1.2800 against the Dollar while the Euro found support above 1.1365. A pass for all UK banks in the latest stress test data also provided some relief.
The Bank of England published its Brexit modelling data along with the financial stability report. The worst-case scenario of a no-deal Brexit was accompanied by warnings of a deep recession, inflationary surge, higher interest rates and a very sharp Sterling decline of up to 25%. The bank stated that these were not forecasts and that it was prepared for all outcomes, although media headlines were inevitably dominated by doomsday scenarios. Immediate market impact was muted as the Dollar moves dictated play, allowing Sterling to move above 1.2800 and the Euro pushed back to the 1.1275 area.
The US Dollar traded in a tight range as the market awaited Federal Reserve (Fed) Chair Jerome Powell’s speech. It seems that more gradual rate hikes are now on the Fed’s agenda.
The US revised the third-quarter GDP growth estimate held at 3.5% compared with forecasts of 3.6%. The goods trade deficit widened to a record $77.25bn for October from $76.25bn the previous month with a small decline in exports while import demand remained strong.
The Greenback weakened on the back of Powell’s comments at the Economic Club of New York. Powell has seen pressure from the White House to hold back from further rate increases, though he said there is ‘no present policy path’ and the Fed will pay attention to economic data to make interest rate decisions. He stated that gradual interest rate increases balance risks to the forecast and he expected solid US growth with low unemployment and near-target inflation.
The comments overall were seen as relatively dovish and the Dollar initially lost ground against the Euro, pushing to highs above 1.1380 from lows below 1.1280. The Greenback failed to regain ground on Thursday ahead of the Fed minutes with markets pricing in only one 2019 rate hike.
Yesterday saw the news that EU delegates are set to agree to the EU Commission’s proposed disciplinary actions on Italy. This caused the Euro to dip to 1.1266 versus the Dollar as the single currency came under fresh selling pressure. Italy responded by saying it was looking at ways to limit public spending, a softer tone than has previously been taken.
Reaction to Bank of England’s comments on a no-deal Brexit in the currency market was limited, which indicates that the Pound and the Euro are already seen as undervalued. Macroeconomic data was generally underwhelming yesterday, across both sides of the pond.
Data today is minimal: Draghi has given a speech, the EU is releasing its financial stability review, and Germany is releasing its CPI data for October.
Data to Watch:
08:00 EUR ECB President Draghi’s Speech
08:55 EUR Unemployment Change (Nov) (Germany)
08:55 EUR Unemployment Rate s.a. (Nov) (Germany)
09:30 GBP Mortgage Approvals (Oct)
10:00 EUR Business Climate (Nov)
11:30 EUR EU Financial Stability Review
13:00 EUR Consumer Price Index (YoY) (Nov)
13:00 EUR Harmonized Index of Consumer Prices (YoY) (Nov)
13:00 EUR Consumer Price Index (MoM) (Nov)
13:00 EUR Harmonized Index of Consumer Prices (MoM) (Nov)
13:30 USD Personal Consumption Expenditures – Price Index (MoM) (Oct)
13:30 USD Personal Spending (Oct)
13:30 USD Core Personal Consumption Expenditure – Price Index (YoY) (Oct)
13:30 USD Core Personal Consumption Expenditure – Price Index (MoM) (Oct)
13:30 USD Personal Consumption Expenditures – Price Index (YoY) (Oct)
13:30 USD Personal Income (MoM) (Oct)
13:30 USD Continuing Jobless Claims (Nov 16)
13:30 USD Initial Jobless Claims (Nov 23)
13:30 CAD Current Account (Q3)
15:00 USD Pending Home Sales (MoM) (Oct)
19:00 USD FOMC Minutes
21:45 NZD Building Permits s.a. (MoM) (Oct)
23:30 JPY Tokyo CPI ex Fresh Food (YoY) (Nov)
23:30 JPY Tokyo Consumer Price Index (YoY) (Nov)
23:30 JPY Tokyo CPI ex Food, Energy (YoY) (Nov)
23:30 JPY Unemployment Rate (Oct)
23:30 JPY Jobs/applicants ratio (Oct)