G20 leaders convene in Argentina against a hectic geopolitical backdrop

Today's news headlines:

  • ‘It’s the only deal possible, EU's Barnier tells Brexit Britain’. Complex deal needs ratification as it stands. (Reuters)
  • 'Theresa May won't rule out no-deal Brexit’. Pound slumps on pessimistic outlook. (BBC News)
  • 'German inflation slows from six-year high as ECB nears QE exit’. Central bank headaches build as policy tightening nears. (Bloomberg)

Each year, the country carrying the G20 presidency—and hosts the annual meeting—selects a theme for the summit. The 2018 convention, which gets underway today in Argentina, is supposed to be about ‘Building consensus for fair and sustainable development’. However, with such a turbulent global political agenda in play, political leaders certainly aren’t going to be short of talking points beyond this. Theresa May will attempt to convince attendees that Brexit will boost the global economy, while Donald Trump’s decision to cancel talks with Vladimir Putin over fresh tensions in Ukraine will also be in focus. The attendance of a Saudi delegation will also be closely followed, in the wake of the Khashoggi killing last month, and anticipation of Riyadh’s next steps over oil. The next Organisation of the Petroleum Exporting Countries (OPEC) meeting is now just days away.

Sensitive touchpoints are abundant, and poorly managed diplomacy could quickly wash any aspect of risk-taking out of currency markets globally. The US Dollar may have recorded a modest retreat in recent days, but if the G20 meeting delivers friction rather than cordiality, the safe-haven allure of the Greenback could easily win out.

Yesterday’s news that Theresa May would accelerate preparations for a potentially economically damaging no-deal Brexit if politicians reject the bill next month rocked markets. The developments hit Sterling, but still allowed the British currency to trade above its recent lows. Downside pressures were further heightened for the Pound after a Consumer Confidence reading from GfK fell to its lowest level in a year; Brexit uncertainty has left buyers more willing to defer big-ticket expenditures in 2019.

Yesterday saw German inflation readings come in slightly below expectations, adding to the European Central Bank’s (ECB) challenge of how to normalise interest rates without stubbing out economic growth. The detail of these readings, however, did show an imbalance. In the country’s most populous regions, inflation actually rose. Today’s consolidated figures from across the Eurozone will, therefore, be closely followed when they’re published at 10am GMT. However, if the anticipated 0.2% decline does materialise, it will call into question whether the ECB has the firepower to come through with its promise of tighter monetary policy. The Euro may find itself exposed as a result.

Data from the US is thin on the ground today as the month—at least on the economic agenda—seems set to finish more with a whimper than a bang. The influential Chicago Purchasing Managers’ Index (PMI)—which measures business conditions—for November may provide some direction. There has been a run of downbeat US economic data circulating of late, but this is forecast to show some modest expansion. However just as sluggish growth is challenging the ECB, indicators running too hot across the Atlantic present their own challenges for the Federal Reserve, where pressure is building to moderate the pace of interest rate hikes.

GBP/USD

After the modest sell-off on Thursday morning, the Pound has traded in a very narrow range against the Dollar. Brexit is dominating Sterling’s fortunes, so each new line from the government has the potential to carry significant weight, although the real direction likely won’t be seen before the vote on May’s deal on December 11th.

EUR/USD

Wednesday’s gains for the Euro off the back of Fed Chief Jerome Powell’s dovish policy outlook have been extended, albeit modestly, in the last 24 hours. The Euro is sitting close to one-week highs against the Dollar, although disappointment in today’s inflation reading could pave the way for some profit taking.

GBP/EUR

Despite the economic woes facing the Eurozone, the Euro is the better performing currency here, highlighting the weight of the short-term risk posed by Brexit. Disappointment in today’s Eurozone inflation reading may initiate a modest reversion, but gains are likely to be limited by the UK’s own political uncertainty.