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Monetary policy in focus; Brexit heightens Sterling volatility


The week ahead is the last full trading week of the year, which could result in thinner than usual volumes, and with it, the risk of heightened levels of volatility.

Monday sees the release of the Eurozone Consumer Price Index (CPI) for November. Expectations are for a significant decline, with the print expected to fall from 2.2% down to 2.0%, its lowest reading since June. This would be in line with the European Central Bank’s (ECB) assessment given at the end of last week over the growing risks of a slowing economy. Any number below what has been forecast would add further weight to the argument that the ECB may need to defer its rate hike ambitions once again.


There’s a forward-looking number due from Germany on Tuesday in the form of the IFO Expectations for December. This is forecast to come in at 98.2, down from last month’s 98.7, reflecting the mounting pessimism over the state of global trade. Protectionist moves from the US have been weighing on sentiment, and as the Eurozone’s economic powerhouse, uncertainty over the outlook could serve to rattle the common currency.

US Housing Starts for November are also scheduled for publication, with a modest uptick predicted. This could raise questions over the Federal Reserve’s ability to dial down its stance on interest rate hikes, as any suggestion the property market is about to spike higher will need to be factored into the central bank’s thinking.


The UK November Consumer Price Index is due for publication on Wednesday, and another gradual decline in inflation will be welcomed by the Bank of England (BoE). A drop from 2.4% to 2.3% has been forecast, and this is unlikely to cause policymakers much concern. The cost of goods is likely to jump sharply higher if the UK ends up with a no-deal Brexit in the new year, so the current combination of falling inflation and rising wages will be seen as providing something of a modest buffer for the economy.

The final Federal Open Market Committee (FOMC) rate statement for 2018 will be published today as well. Opinions remain divided over whether the Federal Reserve will make one more interest rate hike this year and the market is pricing around a 75% chance of this happening at present. However, there are also questions over the longer-term outlook for US monetary policy. The Federal Reserve’s campaign of successive rate hikes hasn’t been popular with Donald Trump, and along with a general flight to safe-havens, the US Dollar has been driven toward fresh highs for the year. In addition to this rate call, the market will be looking for clues in the subsequent statement over the likely outlook for the year ahead. A quarter point hike could be sufficient to call time on policy tightening until well into the new year, at least.


Australian employment data is out for release today, and given the lack of commitment from the Reserve Bank of Australia (RBA) over where interest rates go next, this number could deliver some meaningful direction for the Aussie Dollar. The Unemployment Rate figure is expected to edge slightly higher from recent lows of 5.0% to 5.1%, which will likely be seen as little more than a rounding error. A more substantial jump could raise expectations that the RBA needs to take a more accommodative stance in the new year.

UK Retail Sales for November are also due for publication. Wages may be rising, but with inflation falling and despite consumer uncertainty over Brexit building, an uplift could take place. October’s print excluding fuel came in at 2.2% and was the lowest reading in six months. An increase on the year in November could be something that needs to be factored into any forward guidance from the Bank of England as it publishes its final rate verdict for the year. There’s no expectation that monetary policy will be tightened this time around, but another increase in 2019 has been mooted. The Bank has attracted criticism of late for its negative forecasts over what Brexit will mean for the UK’s economy, so any update on its perspective will be closely followed.


The final UK Q3 Gross Domestic Product (GDP) reading is due to be published on Friday, and there’s an expectation that the economy may be accelerating—at least for now. An uptick for the annualised figure from 1.2% to 1.5% is forecast, although Brexit has the potential to hinder the UK’s growth in the new year. Any GBP upside is therefore likely to prove rather short-lived.

US Durable Goods Orders data for November is also set for release, and a marked rebound from October’s print of -4.4% is expected. Expansion of 1.2% is predicted, something that may raise concerns over the Federal Reserve’s ability to take a more dovish outlook in the new year. The US Dollar is already sitting at inflated levels, but the scope for further gains into the year-end cannot be ruled out.

Rounding off the week is the US Personal Consumption Expenditure, the Fed’s preferred measure of inflation. This is forecast to come in at around 0.2% for the month, giving a reading of 1.9% for the year, slightly below the Fed’s target. Wednesday’s policy statement is likely to have already provided some insight, but in the event this figure diverges markedly away from consensus, the US Dollar may find some fresh volatility as markets begin the wind-down into the Christmas break.

The Federal Reserve Bank of Philadelphia also issues its Non-Manufacturing Business Outlook Survey for December today.