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Firstly, we would like to wish a Happy New Year and a prosperous and productive 2019 to all our readers!

GBP – Focus back on Brexit debate

Whilst we enjoyed a break over the Christmas period, a break from Brexit was particularly welcome.  We return to the subject immediately as the House of Commons is due to return to Brexit debate next week with the delayed meaningful vote the following week.  In the meantime, there have already been a number of interviews and comments in the press posturing ahead of the debate. 

Last year ended with The Bank of England leaving interest rates unchanged at 0.75%.  All nine MPC members agreed which was no surprise given ongoing political uncertainties. Headline inflation fell to nearly a two year low of 2.3% in November and a 1.4% month on month increase in retail sales was down by Black Friday and promotions. 

We start the New Year with a series of PMI surveys.  Manufacturing and construction readings are expected to show further declines, but to remain in growth territory.  The services PMI, however, is expected to increase after a fall in November, though it will also only just be in growth with a reading around 51.  This points to a drop in fourth-quarter GDP following a strong third quarter of 0.6% growth.  

GBPEUR – 1.1105

GBPUSD – 1.2755

EUR – Weaker inflation expected

Last year closed out with German business confidence falling to the lowest level for two years. According to the IFO survey, overall sentiment fell to 101.0 in December. Meanwhile, Italy and the European Commission agreed on a budget deficit target for 2019 at 2.0% of GDP.

The focus this week will be on euro area inflation. We expect a significant fall in headline inflation to 1.7% from 2.0% as a result of lower energy inflation.  Euro area final PMIs are expected to confirm the preliminary readings, with declines to 51.4 for both manufacturing and services. This suggests that fourth-quarter GDP growth will be around 0.3%, although growth fell through the quarter. 

EURUSD – 1.1486

EURGBP – 0.9005

USD – Fed hiked to 2.5%

The US Federal Reserve rounded out the year by raising interest rates by a quarter point for a fourth time to 2.5%. The press statement suggested that further rate rises are less certain and dependent on US economic data remaining strong. The ‘dot plot’ now shows that only two hikes are anticipated in 2019. Chairman Powell also indicated that the reduction in the Fed’s balance sheet would continue. 

We start the new year with the US labour market report. Markets expect another strong reading of close to 200,000 new jobs with unemployment expected to remain at 3.7%.  Annual earnings growth will be closely watched and is expected to edge down to 3.0% from 3.1%. This continues labour market strength will keep the pressure on the Fed to continue increasing interest rates, despite financial market volatility. Fed Chairman Powell is also due to take part in a joint interview with his predecessors Yellen and Bernanke.

GBPUSD – 1.2755

EURUSD – 1.1486

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

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