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May Meets European Resistance

May Meets European Resistance

Confidence in the government remained weak following the unconvincing win in Wednesday’s leadership contest and Theresa May stated that the meaningful vote would occur after Christmas but before January 21st. The political deadlock meant Sterling retreated from highs near 1.2680 against the Dollar and 1.1173 against the Euro.

Theresa May lobbied the Irish backstop issue at the EU Summit and looked for legally-binding text to reduce domestic objection. EU Council President Donald Tusk reiterated that the EU would not negotiate the deal any further. There were conciliatory comments that the EU would work quickly to ensure an Irish backstop would only be temporary if employed at all, but it wasn’t enough to shift UK parliamentary opinion. Sterling drifted towards 1.2600 against the Dollar with the Euro just below 1.1110.


The US Dollar maintained the gains it made on Wednesday against most major currencies. Its recent success is thanks in part to the US Consumer Price Index yesterday. The CPI report showed a steady build-up of inflation pressure that could keep the Federal Reserve on a path of gradual interest rate increases.

US jobless claims declined to 206,000 in the latest week from 233,000 previously, boosting confidence in the labour market, while import prices declined 1.6% for November compared with expectations of 1.0% as energy prices fell sharply.

Markets continued to expect that the Federal Reserve would raise interest rates at next week’s meeting. Assuming a hike occurs, the statement and 2019 projections will be crucial for near-term Dollar direction, especially given the diversity of expectations for next year and the Dollar held steady.


As the market predicted, yesterday the European Central Bank (ECB) kept interest rates at 0.0%, with forward guidance on rates not expected to change until after Summer 2019. The ECB also confirmed it would be winding down its QE programme at the end of the month.

President Draghi delivered his speech stating that incoming data had been weaker than expected and were shifting to the downside. Economic growth forecasts were lowered and, versus the Dollar, the Euro slipped to the 1.1330 level on the back of the speech.

Today sees the release of the flash Eurozone PMIs, but overall confidence in European currencies remained slightly weaker which has kept the Euro at the 1.1350 level versus the Dollar and 1.1110 versus the Pound.


Data to watch:

24h EUR EcoFin Meeting
08:30 EUR Markit Services PMI (Dec) (Germany)
08:30 EUR Markit Manufacturing PMI (Dec) (Germany)
08:30 EUR Markit PMI Composite (Dec) (Germany)
09:00 EUR Markit Manufacturing PMI (Dec)
09:00 EUR Markit Services PMI (Dec)
09:00 EUR Markit PMI Composite (Dec)
10:00 EUR Labour cost (Q3)
13:30 USD Retail Sales ex Autos (MoM) (Nov)
13:30 USD Retail Sales (MoM) (Nov)
13:30 USD Retail Sales control group (Nov)
14:15 USD Capacity Utilization (Nov)
14:15 USD Industrial Production (MoM) (Nov)
14:45 USD Markit Manufacturing PMI (Dec)
14:45 USD Markit Services PMI (Dec)
14:45 USD Markit PMI Composite (Dec)


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