May’s reprieve can’t paper over the cracks
Sterling initially dipped lower on the confirmation that Theresa May would face a no-confidence vote after the 1922 Committee received the requisite 48 letters from Conservative MPs. The Pound was supported below 1.2500 against the Dollar and gradually regained lost ground while increased confidence in Theresa May winning the vote helped Sterling make sharper gains later in the session. Angela Merkel stated her confidence in an orderly Brexit as there was still time to achieve it.
The Pound remained firm ahead of the results and May did win a majority in the confidence vote. The victory margin was slimmer than expected as 117 MPs voted against the Prime Minister. The significant loss of authority maintains market fears of instability and Brexit deadlock. Sterling dipped initially after the result (buy the rumour, sell the fact), although there was support below 1.2600 against the Dollar, and the Euro reaction was muted. EU Council meeting rhetoric today will be key going forward. Also, another weak RICS housing survey maintained concerns for UK economic wellbeing. The Euro held just above the 1.1100 level and the Dollar above 1.2600.
The Dollar retreated somewhat as CPI numbers fell in line with expectations. CPI numbers supported the view that the Federal Reserve (Fed) may raise rates at next week’s meeting, but it is now expected that if a hike occurs, that it will be dovish. Signs of a weakening US economy are stimulating hopes that 2019 won’t see interest rate hikes be as aggressive as previously suggested.
US consumer prices were unchanged for November, in line with consensus forecasts with the year-on-year increase declining to 2.2% from 2.5%. The core increase in prices of 0.2% also met market expectations to give a 2.2% annual increase. There was little reaction to the data with a marginal increase in December rate hike expectations to around 80%.
Yesterday saw the Euro get a boost after the European Commission stated that good progress had been made regarding the Italian budget. PM Conte has suggested reducing the deficit target to 2.4% of GDP and the European Commission will assess whether disciplinary procedures need to go ahead. There was volatility initially but it settled when it looked like a consensus would be reached.
The European Central Bank (ECB) monetary policy meets today and it is widely expected to leave interest rates unchanged, but all eyes will be on their economic projections. Eurozone growth momentum has slowed down recently, and the ECB is expected to revise down its growth and inflation forecasts for 2019.
Following a report that Deutsche Bank was proposing to merge with Commerzbank, the Euro rallied to above 1.1380 versus the Dollar but has plateaued since then. As mentioned, the big news today is the ECB interest rate decision at 12:45 and the ECB monetary policy statement at 13:30.
Data to watch:
07:00 EUR Consumer Price Index (MoM) (Nov) (Germany)
07:00 EUR Harmonized Index of Consumer Prices (MoM) (Nov) (Germany)
07:20 CNY FDI – Foreign Direct Investment (YTD) (YoY) (Nov)
08:30 CHF SNB monetary policy assessment
08:30 CHF SNB Interest Rate Decision (Nov 13)
09:00 CHF SNB press conference
12:45 EUR ECB Interest Rate Decision
12:45 EUR ECB Deposit Rate Decision
13:30 USD Continuing Jobless Claims (Nov 30)
13:30 USD Initial Jobless Claims (Dec 7)
13:00 EUR ECB Monetary policy statement and press conference
13:30 CAD New Housing Price Index (YoY) (Oct)
13:30 CAD New Housing Price Index (MoM) (Oct)
19:00 USD Monthly Budget Statement (Nov)
21:30 NZD Business NZ PMI (Nov)
23:50 JPY Tankan Large Manufacturing Index (Q4)
23:50 JPY Tankan Nonon – Manufacturing Outlook (Q4)
23:50 JPY Tankan Large Manufacturing Outlook (Q4)
23:50 JPY Tankan Large All Industry Capex (Q4)
23:50 JPY Tankan Non – Manufacturing Index (Q4)