An optimistic ending

After a year of endless political and economic uncertainties, this year is wrapping up on a somewhat positive note. Much like a season finale of your favourite sitcom, one gets the sense that many of this year’s themes are drawing towards resolution, but at the same time things are distinctly different and next season won’t be the same.

Brexit and the US/China Trade war both have seemingly hit upon a conclusion, but the keen TV watcher will sense the coming twist. Next year the negotiation of a new trading arrangement between the UK and the EU will begin, which is likely to reveal a whole host of unforeseen obstacles to Boris Johnson’s end-of-2020 deadline. At the moment, the UK PM is ending the year on a strong footing with a sizable majority in Parliament, but once the Brexit withdrawal agreement – the issue which has galvanized his new-found support – is passed, it remains to be seen how the political dynamics will reform in the crucible of post-EU Britain.

Even heading into Christmas week, conciliatory sounds are emerging which point towards an easing in trade tensions between the US and China. The phase one deal, if nothing else, provided a path to stabilisation of ongoing tit-for-tat tariffs and even an easing of some of the accumulated pressure.  Given all the twists and turns this year, most view this trade deal like a dry January pledge – with well wishes but a heavy dose of scepticism. In order to unlock the greater part of frozen business spending, a second more comprehensive agreement is required to demonstrate long-term viability of trade links. In the new year, under the shadow of impeachment and the start of election season, a journey towards a phase two deal is certain to be an uphill battle.

Bottom Line: There is little data heading into a quiet few days of the month. Mostly markets are alert for issues which plagued funding markets several times this year. Aside from that, liquidity is likely to be thin before the new year. Unless some unexpected news headlines move markets, economic data is unlikely to do so.

 

The week ahead

GBP

Sterling traded in a tight range against the US Dollar last week, capping its losses at just over 3% for the week. This week has started on stable ground as the Pound has bounced back above the 1.30 level amid a broad Dollar pullback. The holiday mood is likely to limit any market moves, with no UK data due out and only durable goods orders due from the US. The UK government passed its Brexit withdrawal bill on Friday and this should lead to increased optimism that the UK will leave the EU by Jan 31st.

  • No data is due out of the UK this week.

USD

A stronger trade-weighted Dollar on Friday took the currency pair back into familiar territory around the mid-1.10 range against the common currency that we saw to begin the month. Friday’s solid US data pointed to sustained economic growth levels across the pond, as the US looks to extend its longest period of expansion in history. Looking forward, markets will hope for continued improvements in the US-China trade relationship to support renewed risk appetite into the coming year.

  • Today we have durable goods and core durable goods orders out of the US for the month of November. The core measure is expected to jump to 1.5% from 0.5% previously, with the overall measure falling from 0.5% down to 0.2%.

EUR

Broad Euro weakness took the common currency below the 1.11 mark against the Greenback and took GBP/EUR back to almost 1.18 on Friday. It’s set to be a quiet holiday week, with no data due out of the bloc. Looking forward, the FT reports that ECB president Christine Lagarde is set to significantly change the central bank’s inflation target, potentially altering the course of monetary and fiscal policy into 2020.

  • Nothing significant due out of the bloc this week.