Currency markets eye quiet run into Christmas break

Today's news headlines:

  • ‘Black Friday fuels UK sales rise’. A surge in spending surprised markets yesterday after heavy discounting encouraged consumers to spend in the second half of November. (The Guardian)
  • ‘Philly Fed manufacturing index in December weakens to more than two-year low’. Markets had forecast an improvement, rather than a decline. (MarketWatch)
  • ‘The Fed is in a “sweet spot” to bring rates back to neutral, says former Governor’. Robert Heller suggests two interest rate hikes next year might not be enough. (CNBC)

There may have been a number of surprises in yesterday’s economic data, but currency markets were quick to dismiss these factors. UK Retail Sales spiked higher in November off the back of Black Friday sales, although any upside for the Pound was quickly reversed by an even more bearish assessment of Brexit from Bank of England (BoE) Governor Mark Carney. Data from the US failed to inspire too, leaving the Dollar index to continue its slow descent from recent highs. This benefitted the Euro, which moved out to close on two-month highs against the Greenback during yesterday’s session.

Opinion remains divided as to exactly what 2019 will hold for monetary policy at the Federal Reserve. New signs of weakness emerged in yesterday’s Philadelphia Fed index data, but at the same time, influential commentators suggested the idea of only two rate hikes in the new year wouldn’t be sufficient to rein in inflationary pressures. US Durable Goods Orders data for November is set to be published at 1.30pm GMT, and this may provide a little more direction. The Greenback’s fairly marked sell-off in recent days does have the potential to leave room for something of a rebound, especially if this print comes in above the expected 1.7%.

The US Personal Consumption Expenditure Deflator print is also set for 3pm GMT today, and as the Federal Reserve’s preferred measure of inflation, this has the potential to provide some significant direction for the US Dollar. With questions lingering over just how aggressive a stance will need to be taken over rate hikes in the new year, numbers like this have the potential to provide some meaningful insight and USD crosses could react accordingly.

Eurozone Consumer Confidence is also scheduled for publication at 3pm GMT and another negative reading is expected. With the European Central Bank (ECB) sticking to the script regarding policy tightening, a pessimistic outlook shouldn’t be much of a surprise, although recent austerity-breaking moves by France and Italy should perhaps be offering a little more optimism. Critically, the ECB cannot afford to dampen any emerging economic growth with its campaign to normalise monetary policy.

GBP/USD

Sterling has continued to drift higher against the Dollar, although downside risk remains given the overhanging political uncertainty in the UK at present.

EUR/USD

The prospect of policy tightening in the Eurozone at the same as the US eases off such a strategy is lending support to the common currency. EUR/USD has gained around two cents in the last week and now seems to be moving away convincingly from the year’s lows. However, any signs of a more hawkish stance from the Fed would see gains being eroded quickly.

GBP/EUR

Confidence over the economic outlook in the Eurozone, plus political disarray in the UK, has left the Pound on the back foot. GBP/EUR sits very close to year-to-date lows, but scope for further selling can’t be ignored.