Developments in politics key

GBP – Commons defeat again

Following the House of Commons defeat last week, we have learned very little.  The Government’s latest motion was defeated but we know little more regarding the UK’s path to leaving the EU. The focus now shifts to the 26/27th February, when the Prime Minister is scheduled to announce her progress to MPs.  There will be further debate and amendments for alternative courses of action. News headlines will again be closely watched.

Sterling remains subdued following mixed economic data and more dovishness from the Bank of England. The probability of a 2019 BoE hike is now around 30%.  Following disappointing fourth quarter GDP data (0.2%) and the softer BoE outlook, December labour market data is unlikely to have significant market impact.

Expectations are for a modest increase to 3.5% annual wage growth. However, if demand growth remains subdued, we could see the output gap widening. It is therefore important to take the latest wage numbers in the context of forthcoming business sentiment surveys.

GBPEUR – 1.1416

GBPUSD – 1.2910

EUR – PMIs minimal growth

Eurozone figures last week confirmed weak GDP growth of 0.2% in the fourth quarter.  This is in line with a third quarter figure that was partly blamed on temporary factors. The first reading of German GDP suggested that the country narrowly avoided a recession, contracting in the third quarter and flat in the fourth quarter.  Early signs from business surveys do not suggest a rebound at the start of 2019. The Eurozone composite PMI edged down to 51.0 in January, its lowest level for more than five years. Manufacturing sentiment continued to fall (to 50.5) on softening global demand, dipping below the key 50 growth level in Germany and Italy.

This week’s February survey results will provide evidence on whether the loss of momentum has continued.  We expect small declines in the Eurozone manufacturing and services PMIs which should still show meagre growth, just above 50. German IFO survey headline index is also forecast to edge lower to 99.0.  

European uncertainty extends beyond its economy. With a snap election called in Spain after Prime Minister Sánchez’s budget bill defeat.  A number of other European countries, as well as the European Parliament, are having elections this year. Spain’s snap elections are set to take place on 28th April, with polling likely to be watched for prospects of a shift to the right.

EURUSD – 1.1308

EURGBP – 0.8760

USD – Trade talks continue

US and China trade tensions sit at the front of market focus.  The 1st March deadline for a deal between the world’s two largest economies is fast approaching. There has been some indication from President Trump that a further moratorium on the plans to increase tariffs may be possible.   Meanwhile, the press are reporting that talks will continue into next week to pave the way for a meeting between the two nations’ leaders.

Data releases continue to be delayed by the January shutdown, meaning it is not an exciting week for US data. A further shutdown was narrowly avoided as Trump reluctantly signed a bipartisan spending bill allocating USD1.4bn for border was fencing.  President Trump has announced that he will redirect $6bn in federal funds to build the remainder of the wall using national emergency powers.

The February Markit PMIs and December durable goods numbers are the only releases of note. These are expected to show a modest slip in February’s readings.  This follows last month’s surprising strength and demand in the manufacturing sector that remained robust at the end of last year.

The Fed will also be in focus, with the FOMC’s January meeting minutes released and a variety of Fed speakers.  They will be discussing monetary policy strategy, the Fed’s balance sheet and inflation prospects. This will offer additional insight into the Fed’s recent dovish messaging. The minutes will provide some understanding of the conversations at the January meeting.

GBPUSD – 1.2910

EURUSD – 1.1308

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*Interbank rates correct as at 7 am on the date of publishing