Move aside Brexit, Eurozone likely to take focus in coming days

Today's news headlines:

  • ‘Eurozone economy slows further as manufacturing slumps’. Purchasing Manager Indices for France and Germany fall while Italy looks likely to enter a recession soon. (Financial Times)
  • ‘Investors say markets unlikely to help Theresa May on Brexit’. Speculation that if the Brexit bill fails in Parliament, Sterling won’t be rattled. (Financial Times)
  • ‘Draghi opens crucial ECB week as bond-buying exit decision nears’. Questions are still being asked as to whether bond-buying should be capped next month. (Bloomberg)

EU leaders met in Brussels yesterday, swiftly ratifying the Brexit proposals and leaving Theresa May in the unenviable position of now trying to sell the unpopular deal to UK politicians, few of whom appear to be all that happy with the outcome. With the Parliamentary vote in Westminster not expected to be seen for at least two weeks, there will be no shortage of rhetoric from opposing sides in the days ahead. However, even if it seems inevitable that the vote will fail to be passed, at least at the first reading, and markets are willing to ride this out, the bigger short-term risk remains a leadership challenge for Theresa May. The Democratic Unionist Party (DUP) has threatened to withdraw its support, which is seemingly a very real risk, and one that has the potential to trigger a general election. The accompanying uncertainty to this act would leave the Pound reeling.

However, the Eurozone faces a challenging week too. European Central Bank (ECB) Chief Mario Draghi testifies in front of the European Parliament today, amidst sluggish growth data for the currency bloc and just days ahead of the last inflation reading before the European Central Bank’s final meeting for the year. For months, the ECB has been persevering with the idea that bond-buying would cease this month and interest rates would start rising after next summer, but economic headwinds have been building. Hopes had been pinned on a fourth quarter rebound in growth, but Friday’s Eurozone Purchasing Managers’ Index (PMI) data highlighted more shortcomings. This included the fact that Italy is now at risk of sliding into recession. Failure to see a compliant inflation reading on Friday—the ECB is charged with keeping the reading just below 2.0%—could serve a blow to the Bank’s monetary policy ambitions. Any clues in today’s testimony will have the potential to pressure the Euro.

The US returns to work today following the Thanksgiving weekend shutdown. Some disappointing PMI readings were released on Friday, adding to concerns that the world’s largest economy is slowing. Data today is still thin on the ground, although attention is going to be increasingly focused on the G20 world leaders’ meeting, which gets underway on Friday. Despite the warning bells over the US economy—something that’s likely to be reiterated on Wednesday with the updated Q3 Gross Domestic Product (GDP) readings—the stand-off between Presidents Trump and Xi shows no sign of abating. However, in light of mounting economic uncertainty in Europe, the US Dollar may be able to find some safe-haven support at least in the short-term. The DXY Dollar index has rebounded from last week’s lows already, but if there’s further evidence that the Federal Reserve will need to moderate its approach to policy tightening in the New Year, then that’s further justification for time to be called on the run of strength that has defined the Dollar through 2018.

GBP/USD

The Pound has seen some very modest gains off the back of the weekend’s seamless Brexit progress. The upside is likely capped by a belief that UK lawmakers will reject the Brexit bill in Parliament during the first reading, while signs of a slowing US economy are also lending support.

EUR/USD

Modest gains have been seen by the common currency overnight, helped by the weekend’s display of unity amongst the remaining 27 European Union member states. Mario Draghi’s comments to the European Parliament today, plus the release of fresh economic data, could leave the pair exposed on the downside.

GBP/EUR

Sterling has seen some weakness creep in overnight against the Euro as markets await the next move. Dovish notes from the ECB would pave the way for another leg higher, while a leadership challenge against Theresa May could readily see a return to last week’s lows.