Brexit negotiations continue

GBP – Bank of England to hold rates

Last week Prime Minister May delayed the House of Commons vote on the Brexit withdrawal deal as it clearly didn’t have enough support.  She then won a leadership challenge from her back-benchers.  Her next challenge is to renegotiate the withdrawal deal with an unwilling EU. Parliament is due to break for Christmas on Thursday and won’t be back until 7th January.  The vote on the withdrawal bill is expected before the 21st January deadline. 

The Bank of England will leave rates unchanged amid Brexit uncertainty but may note recent pick up in wage growth. Ongoing Brexit uncertainty makes it unlikely that any Bank of England policymaker will be in favour of a hike in interest rates this week.  We expect a unanimous vote for no change in policy from the Monetary Policy Committee. Following the stronger wage growth data last week (up 3.3%), there is some pressure to think about an earlier opportunity for a rate hike. 

GDP rose 0.1% in October as manufacturing output slipped sharply. Inflation is expected to show a modest fall in both annual ‘headline’ and ‘core’ inflation. Meanwhile, November retail sales are forecast to show little growth after two months of decline. That is further evidence that spending has faltered through the autumn after a surprisingly strong summer. The second reading for third quarter GDP growth is expected to be unchanged from the initial estimate at 0.6%.

GBPEUR – 1.1124

GBPUSD – 1.2584

EUR – ECB end net asset purchases

Last week the European Central Bank ended its net asset purchase programme but confirmed that their first rate hike is some way away.  The ECB has widely signposted this for a number of months and it came as no surprise to the markets.  Given the weakening European data, we expect the ECB will continue to see how whether the economy picks up in 2019 before committing to further changes.

Eurozone composite PMI fell by more than expected in December to 51.3 from 52.7.  This was partly due to ‘yellow vest’ protests in France.  Of most interest in the Eurozone will be Tuesday’s German IFO for December, which will be watched closely after weaker readings from the PMI measures.  The Swedish Riksbank joins the US and UK with an interest rate decision, but like the Bank of England, no change is expected. 

EURUSD – 1.1312

EURGBP – 0.8990

USD – Fed to hike 0.25%

The Federal Reserve’s policy meeting is likely to have a significant impact on financial market conditions heading into 2019. Since Fed policymakers met in November, markets have reduced their interest rate expectations. A rate hike of 0.25% is expected this week, but the chance of at least one further hike in 2019 has dropped from 90% to 50%. Recent speeches by Fed policymakers have taken a more ‘dovish’ line, emphasising potential headwinds to economic growth next year as rates move closer to a ‘neutral’ level. 

We expect the Fed to confirm that the pace of tightening will slow in 2019 but warn that further hikes are still on the cards if economic growth remains strong. Meanwhile, the Fed may scale back interest rate forecasts but we still expect them to point to at least two further increases in 2019. 

US November ‘headline’ CPI growth slowed to 2.2% from 2.5% but the ‘core’ rate accelerated.  US November retail sales rose by a stronger than expected 0.9%.  Meanwhile, US November housing starts and consumer spending will provide updates on key sectors that are showing conflicting trends. Housing activity has faltered this year, while consumer spending continues to be a key support for economic growth.

GBPUSD – 1.2584

EURUSD – 1.1312

Do get in touch if you would like to discuss further.

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