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Sterling adopts firmer tone

GBP - Labour gains in the polls

The main currency pairs were confined to narrow ranges last week. Although, Sterling has adopted a slightly firmer tone on the back of opinion polls that continue to show a healthy lead for the Conservatives ahead of next week’s UK election. A Tory win would pave the way for the ratification of the revised Brexit deal. The slightly firmer Sterling tone is reflected in GBP/EUR opening this morning up above €1.17 (Interbank). At the same time, GBP/USD is operating above the $1.29 level.
 
Considering the Labour party is gaining ground in the polls, the currency moves have not been that big. The last four opinion polls show the Labour vote at 33%, an increase from 25% a month ago. However, this still leaves it about 9 percentage points behind the Conservatives. If the gap was to narrow further to 5 or 6 points, then it could be a challenge for the Conservatives to get a majority. However, the gains in the polls by Labour have been mainly at the expense of the Liberal Democrats, who are currently haemorrhaging support. The Conservative vote is actually holding up well at around 42% and it has recovered ground in Scotland. Nonetheless, it is too early to say with certainty that the election is in the bag for the Conservatives and the opinion polls over the next week will be closely watched.
 
Recent UK economic data has been weakening and the prospect of continuing uncertainty around Brexit in 2020 is likely to push the BoE to cut interest rates next year. The year-on-year growth rate of the economy slowed to 1% in Q3, the weakest since 2010. Employment has also started to contract in recent months. The manufacturing PMI fell to 48.3 from 49.6 in October. However, more concerning, the services PMI dropped from 50.0 to 48.6; these are recession levels. Meanwhile, inflation has fallen back to well below 2% as two MPC members voted to cut rates at the November meeting. All in all, as it stands, it would not be a surprise if the BoE cuts rates by 25bps in the first half of 2020.

EUR - Lagarde takes charge

The Euro dropped to a near seven month low versus the Pound last week and continued to dance around a key resistance level versus the Dollar, despite more positive inflation numbers from the Eurozone. With the Pound rallying through election polls the Euro dropped to the 0.85p level before tailing back narrowly by week end. Similarly, with thin trading in the US for Thanksgiving the 1.10 handle was tested and EUR/USD dropped to a near two month low of 1.0980 before once again stabilising above the key 1.10 level. Eurozone inflation was 1% in November, up from the previous figure of 0.7%. Core inflation which is often a more reliable measure of price trends also rose from 1.1% to 1.3%.
 
The numbers from last week come in just as new ECB chief Christine Lagarde looks set to oversee her first official meeting today, as she is scheduled to testify in front of European parliament. Any news on further fiscal stimulus will likely drive direction for the Euro in the short term whilst political concerns also continue to mount in Germany where Angela Merkle’s coalition government looks set to come under threat.

USD - Employment numbers key for strong Dollar 

With thin trading last week due to thanksgiving in the US, the Dollar was still able to gain against most currencies mid-week on the back a raft of positive numbers. Durable Goods orders, Pending Home Sales and US Q3 GDP second reading all came in better than forecast, therefore offering the Greenback some strong support.
 
The week ahead could also offer some further good news for the Dollar, in the form of US employment and manufacturing data. With a likely rise in the employment number, hold on unemployment rate, a slight rise in wage inflation, we could easily see the US gain strength across most of the major currencies.  

AUD and NZD - Chinese PMI data strengthens AUD and NZD

Both the AUD and NZD performed well recently, following better than expected Chinese Purchasing Managers Index readings. The data release beat expectations coming in at 51.8; a 3 year high, indicating that the Chinese economy is doing better than expected and could be part of a broader turn around. This release strengthened both the Australian Dollar and also the New Zealand Dollar.
 
Will the RBA cut interest rates again? Will they introduce Quantitative Easing? We may find out this week with the RBA meeting due on Tuesday AM. The Reserve Bank of New Zealand is also releasing its Capital Review data on Thursday. The outcome of this could potentially influence projections for economic growth and interest rate movement which all have a significant bearing on the value of the NZD.
 
Short term, GBPNZD and GBPAUD rates will also be impacted by the UK general election on the 12th December and any poll releases in the run up to this date.