Brexit developments dominated last week’s currency market agenda. Additionally, mounting speculation that a breakthrough may yet emerge in the US-China trade dispute also played a meaningful role. As the week ahead unfolds, it would seem unlikely that there will be any change to these key driving factors.
Theresa May is set to provide a statement to parliament on Monday following the Brexit amendment politicians tabled last week. Now, the Prime Minister has to give a response within three days after she lost the vote on her Brexit deal last Tuesday. This could provide some critical insight as to whether any cross-party progress has been made. However, it could also highlight whether the UK is moving towards a more dramatic way to break the deadlock, such as a general election. As markets dislike uncertainty, the upheaval of an election would have the potential to weigh on the Pound.
The week starts with the Martin Luther King public holiday being observed in the US. This means that there will be no economic data released from across the Atlantic. Meanwhile, a subdued economic calendar elsewhere could mean direction from any fundamental data releases proves to be thin on the ground.
Tuesday will see the release of the latest UK employment and average earnings data for November. The unemployment rate is forecast to hold steady at 4.1%, and although income growth may show a very modest decline from a month ago, this needs to be taken in the context of falling inflation, which last week dropped to 2.1%, the lowest level in two years. Wage growth is still expected to be above 3.0%
The ZEW Eurozone and German sentiment surveys are also expected, and despite some glimmers of optimism earlier in the year, the broader trend of economic news from the Eurozone can perhaps be best described as downbeat. Forecasts suggest this will be communicated in the ZEW releases with the German sentiment index for January forecast to slide further from last month’s reading of -17.5. This print has come in negative for the previous nine months, reflecting ongoing uncertainty over both Brexit and international trade.
The flash Eurozone Consumer Confidence reading for January is set for publication and expected to show further deterioration as concern builds over the health of the currency bloc’s economy. The impact of withdrawing European Central Bank (ECB) stimulus measures was always going to take a toll on sentiment, but the timing has coincided with a worsening global trade outlook. The expectation is that a reading of -6.5 will be seen, down from December’s -6.2 and making for the worst reading since late 2016.
US Mortgage applications for the week ending January 18th are due for release and may well be depressed as a result of the ongoing government shut down. Not only are some 800,000 Federal employees going without paychecks, but there’s a trickle-down effect hitting the broader economy. A break lower from the reading of 13.5% seen last week and a return to negative territory would be of little surprise.
The European Central Bank will announce its latest monetary policy stance following the conclusion of its two-day meeting. The bond-buying stimulus has been concluded and late last year talk had been of an interest rate hike in the third quarter of 2019. There is already an expectation that some kind of renewed stimulus measure may be needed, possibly through an auction of cheap long-term loans. Any indication of this, or suggestions that a rate hike may have to wait until 2020 could prove damaging for the Euro.
German IFO Expectations will provide another valuable forward-looking indicator of sentiment for the market. Despite a darkening economic outlook, a majority of German businesses are pushing for a rate hike from the European Central Bank, so although forecasts suggest there may be a decline, it could still look better than many may anticipate. Forecasts see the January print falling to 96.8 from last month’s 97.3.