Monetary policy debate set to accelerate into year end

Today's news headlines:

  • 'Draghi confirms plan to end QE despite weak economic data’. Despite slowing growth, inflation still expected to increase. (Financial Times)
  • ‘May urges Cabinet to get out and sell Brexit deal’. UK Parliament to vote on contentious proposals on December 11. (Financial Times)
  • ‘Inflation may soon sink back below 2% target, San Francisco Fed says’. Inflationary factors seen as unlikely to persist. (MarketWatch)

Brexit may continue to dominate the agenda for many over the next two weeks as Theresa May attempts to sell the deal she has brokered to the country as a whole, but beyond this, inflation chatter has found itself very much back on the radar in recent hours. European Central Bank (ECB) President Mario Draghi’s testimony to the European Parliament yesterday saw his resolve to start normalising monetary policy unchanged, despite renewed signs of sluggish economic growth within the Eurozone. Italy may be on the brink of tumbling into recession, but with inflationary pressures on the horizon, the bond-buying is still expected to end next month. Conversely, across the Atlantic, the San Francisco Federal Reserve is cautioning that US inflation is poised to fall below 2.0%. This would pave the way for a more accommodative stance over monetary policy and could, in turn, start to weaken the US Dollar.

US Consumer Confidence is the high-profile economic reading due for release today, scheduled for 3pm GMT. Expectations are for a modest decline to be reported, and while this may contrast with the heightened levels of retail activity seen over the ‘Black Friday’ weekend, analysts have been quick to point out that the scale of discounting has hardly been kind to retailers. According to Adobe Analytics, some $6.4 billion was spent online on Saturday and Sunday alone, making it the biggest online shopping weekend in US history. However, the hefty price cuts suggest that these sales have ultimately proved hard to win.

Political risk remains an issue for both Theresa May and the Pound. It has now been confirmed that Parliament will vote on the Brexit deal on December 11th, giving the Prime Minister less than two weeks to convince both lawmakers and the electorate that the deal on the table is as good as it gets. Criticism has already been mounting and Donald Trump waded into the fray yesterday, suggesting that the proposal would make it difficult for the UK to strike a trade deal with the US. Media reports propose that as many as 46 letters of no confidence over Theresa May’s leadership have now been sent to the 1922 committee, just two shy of the number necessary to trigger a vote on her role. Equally, however, Brexiteers are said to be willing to throw their support behind the deal if Mrs May agrees on a date for her resignation. The Brexit saga—and the accompanying political theatre—still has a long way to run. The uncertainty this brings could still prove damaging for the Pound, at least in the short-term.

GBP/USD

The Pound found some support early in yesterday’s session against the US Dollar, although gains were cut short off the back of some marginally better than expected data from the Chicago Fed, and renewed concern over Theresa May’s ability to get the Brexit deal through parliament. An undershoot in today’s US economic data may provide some support for the Pound, but political uncertainty in the UK could make this difficult to sustain.

EUR/USD

Mario Draghi’s commitment to tighter monetary policy hasn’t provided that much support for the common currency, although the pair is drifting higher in early Tuesday trade. News from Italy that the government may be willing to cut its deficit target a little does appear to be helping, although Rome remains on a collision course with Brussels over other aspects of its budget.

GBP/EUR

The Pound has been stuck in a very narrow range against the Euro since the end of last week, and with an absence of economic data from both the Eurozone and the UK today, there’s little to suggest that anything will change here soon. UK political risk remains front of mind and could still leave the Pound exposed.