Tories make election headway
Sterling was unable to make any headway in early Europe on Wednesday with fragile international risk conditions and concerns over the global growth outlook a significant factor curbing UK currency support given the economy’s trade dependency. There were no substantive developments surrounding the General Election, but markets considered that a strong Conservative Party poll lead had been priced in which limited the potential for fresh buying interest.
UK 5-year credit default swaps declined to an 18-month low which suggested that underlying fears had eased which should provide an element of Sterling support. There were also expectations of investment inflows if political uncertainty declines. Sterling drifted lower into the US open, but found support below 1.2900 against the dollar and gradually recovered to 1.2925 this morning while the Euro retreated slightly to just below 1.1660 as global risk conditions dominated.
US Federal Reserve (Fed) Governor Brainard stated that the central bank had taken out insurance against the risks from trade uncertainty. She wants to see how the economy reacts to existing rate cuts and expected economic growth to be above trend in 2020.
Minutes from the October Fed meeting indicated that most policymakers considered that, barring a material assessment of the outlook, rates would be at an appropriate level following the latest rate cut. Two members supported the cut, but considered it a close call while some favoured holding rates steady. There was agreement that risks were still tilted to the downside while members were divided over the inflation outlook.
The latest ECB Stability Review stated that a further increase in counter cyclical buffers was merited in several countries with top stability risks including risk taking among shadow banks. ECB Vice-President de Guindos also commented that the side effects of monetary policy are becoming more evident.
There are still strong expectations that the ECB would keep interest rates at extremely low levels and German yields moved lower, although rate spreads moved slightly in the Euro’s favour. As of writing the the Euro is currently trading at 1.1078 against the Dollar.
Data to watch
12:30 – EUR – ECB Monetary Policy Meeting Accounts
13:30 – USD – Philly Fed Manufacturing Index