Transitional period to include trade deal hiatus
Political uncertainty continued to weigh on the Pound as the House of Lords Constitution Committee stated that there were major flaws with EU withdrawal legislation. EU ministers signed off on a negotiating stance for a transition arrangement on unchanged terms until the end of 2020, but no institutional representation. David Davis is keen to ensure that the UK be able to forge new trading agreements during the transitional period.
Markets are cautious of volatile month-end trading conditions after some Sterling selling yesterday. The Pound declined to lows near 1.4025 against the Dollar before a tentative recovery while the Euro strengthened, moving past 1.1365. Sterling drifted lower with a retreat to near 1.4000 against the Dollar this morning.
The Dollar is rising alongside 10-year US government borrowing costs that have risen to their highest since 2014, in a sign of optimism over the US economy and market expectations for continued rate hikes from the central bank.
US consumer spending rose solidly in December, rising 0.4% from November when it rose 0.8% as demand for goods and services increased. Still to come this week we have the Federal Reserve meeting, Trump’s first State of the Union Address, and the December employment report. Expectations of favouring interest rates at tomorrow’s FOMC meeting appear to be bolstering the upside momentum in both yields and the Buck. Also, the probability of further rate tightening in March has moved up to approximately 78% according to FedWatch.
On the data front, the S&P/Case-Shiller index is due later seconded by the CB’s consumer confidence for the month of December.
The European Central Bank’s (ECB) chief economist, Peter Praet, stated that policy normalisation will begin once inflation growth is sustainable, and that patience is required, largely in line with Draghi’s press conference last week.
By late afternoon, there were comments that the ECB expected bond purchases to end with a short taper. Overall, the Euro declined to lows just below 1.2340 as the Dollar staged a limited recovery. Euro rallies were capped below 1.2400 with a fresh drift towards 1.2350 as a paring of long positions continued ahead of tomorrow’s Fed statement.
Data To Watch:
09:30 GBP Consumer Credit (Dec)
09:30 GBP Mortgage Approvals (Dec)
10:00 EUR Gross Domestic Product s.a. (QoQ) (YoY) (Q4)
10:00 EUR Services Sentiment (Jan)
10:00 EUR Consumer Confidence (Jan)
10:00 EUR Industrial Confidence (Jan)
10:00 EUR Economic Sentiment Indicator (Jan)
10:00 EUR Business Climate (Jan)
13:00 EUR Harmonised Index of Consumer Prices (YoY) (Jan)
14:00 USD S&P/Case-Shiller Home Price Indices (YoY) (Nov)
15:30 GBP BOE’s Governor Carney speech
16:30 EUR ECB’s Mersch speech