Currency markets calm as last full trading week of 2018 kicks off

Today's news headlines:

  • ‘French PM predicts budget deficit at 3.2 percent of GDP in 2019: Les Echos’. Macron’s concessions to rioting protestors have cost the economy dearly. (Reuters)
  • ‘Euro risks remain to the downside as Fed may do little for bulls’. Federal Reserve policymakers are likely to acknowledge risks to the global economy in the upcoming meeting. (Bloomberg)
  • ‘A quieter week for the pound?’ A less chaotic week ahead is seen as an unlikely scenario; Theresa May remains Prime Minister, paving the way for another crisis before a pivot to Brexit Plan B. (Financial Times)

Major currencies are off to a steady start to the week, although a busy few days lie ahead. Central Banks will likely take the limelight with the Bank of England (BoE), Bank of Japan (BoJ), and Federal Reserve all set to make policy announcements. Volatility also stands to be further exacerbated, both by year-end portfolio rebalancing and the fact that volumes will likely start to be suppressed by the holiday wind-down.

Reports are emerging suggesting that some form of consensus has been reached between Rome and Italy over the Italian budget proposals for 2019. While this may well help head off a bigger issue in the short-term, concerns remain that the growth forecasts are unsustainable. Additionally, the weekend also saw news from France that the fiscal concessions made following weeks of rioting will prove incredibly costly, pushing the country’s budget deficit well beyond target for the new year. The risk is that other Eurozone members will now start looking to make their own anti-austerity concessions in a bid to buy public support, presenting fresh risks for the common currency as interest rates start to tick higher.

The Brexit saga rolls on, but at least there has been no adverse reaction from the Pound, so far, to the news that the European Union is to issue its own guidance on dealing with a no-deal Brexit. There’s a degree of speculation this is increasingly being seen as a game of brinksmanship, with each party trying to force the hand of the other as the rhetoric is dialled up. A hard Brexit would benefit neither side, but the biggest impact would be felt in the UK, leaving the Pound exposed if the market starts buying into these fears—especially as volumes slow into the year-end.

In the near-term, economic data stands to be dominated by the Eurozone. After last week’s cautionary note from the European Central Bank (ECB), today’s revised November inflation reading will be closely followed. In the event this comes in below 2.0%, the pace of deceleration could prove a cause for concern. This would likely put fresh pressure on the EUR/USD currency pair, which is already being squeezed as global growth concerns build.

Data from the US is relatively limited in the hours ahead although some upbeat housing news is expected, with the National Association of Home Builders (NAHB) providing an indicator for forward-looking home sales. This is expected to tick higher, and although it makes for a comparatively low-level reading, gains may provide some further support for the US Dollar.

GBP/USD

The Pound has traded in a very narrow channel against the Dollar in recent trade, underlying the lack of meaningful developments around Brexit in the weekend media. Downside pressure could well emerge off the back of further uncertainty as to what happens next in the political process.

EUR/USD

Some very modest gains are being recorded for the common currency in early trade as the pair looks to recover some of Friday’s lost ground. Optimism over the Italian budget deal is also lending some support. However, failure for the inflation reading to impress could be sufficient to reverse gains.

GBP/EUR

The Pound is again stuck in a very narrow channel against the Euro, although with no UK economic data on the table until Wednesday, Sterling stands exposed to volatility emerging off the back of Brexit fears.