Little came out of yesterday’s Bank of England meeting except the appointment of a new governor, the former head of the Financial Conduct Authority, Andrew Bailey. Given the proximity of the Tory landslide election result, it is too soon to tell what enduring impact a majority will have on fundamentals. Few people would doubt that the upcoming Brexit deal is the more important hurdle before the UK economy hits the straight-away. At 2:30 today, UK Parliament will vote on the proposed withdrawal agreement bill to take the UK out of the EU by the 31st of January.
Looking past all the impeachment drama, the US economy seems to have gained momentum over the past couple of weeks. Quite a few readings from this past Tuesday such as JOLTS Job Openings, IBD/TIPP Economic Optimism survey, Industrial Production and Capacity Utilisation all pointed to a distinctly faster pace of growth. Later today we are expecting some key consumer data which will help identify if this improvement is as broad based as the market hopes.
Bottom Line: A brighter market expectation for 2020 is slowly becoming more credible, based on some recently released US data points. Signs out of China have also indicated the largely superficial phase one trade deal has had a positive impact on business confidence. Even if a phase two deal is not forthcoming, a cessation of hostilities may be enough to help turn the tide of the past years decline.
Yesterday brought much the same for Sterling, as several factors meant another fall for the trade weighted index. UK retail sales disappointed, coming in at -0.6% compared to the predicted +0.3%, then the Bank of England delivered a dovish hold on UK interest rates with two members voting for an immediate cut. Today, markets will look for some optimism from Q3 GDP data and the passing of Boris Johnson’s Brexit withdrawal bill agreement in Parliament.
Sterling’s decline against the common currency took the pair briefly below the 1.17 handle in yesterday’s trading session. This represents a loss in value of just about 3% on the week as markets expect the UK’s Brexit transition will be anything but simple. With liquidity thinning out towards the holiday period, we expect to see a bit more volatility for the pair following any Brexit or political developments.
The Euro has traded relatively flat against the Greenback this week, but that could change with some important data due out of the US later today. The Fed’s preferred measure of inflation, the core PCE deflator, is due to indicate that US inflation sits below the Fed’s 2% target. An overshoot of expectations might lead to a Dollar rally, taking the pair back below the 1.11 mark, as markets see a pause in Fed cuts as justified.