This week will be very significant for the Brexit process. The House of Commons will vote on the withdrawal agreement and political declaration on Tuesday evening. There has been speculation of delays to the Brexit vote, though these have been played down. The debate on Tuesday is due to finish around 7 pm. There will then be votes on up to six amendments, followed by the final vote on the agreement.
There is clearly a lot of concern that the government will be defeated. If that happens, the size of the vote against the motion and its composition will be important. As markets expect the Brexit vote to be defeated, there is likely to be a smaller impact on sterling. Approval would see a sizeable bounce for sterling. If the government loses the vote, it is not clear what will happen next. There may be calls for a vote of no confidence and calls for a general election, though it is not clear there would be sufficient support for either. There is also an EU summit next week, which will give the Prime Minister a chance to negotiate for changes to the withdrawal bill which may give the motion the chance to pass on a second vote. The EU’s current position is that it is not prepared to renegotiate.
Last week’s PMI showed stronger than expected construction and manufacturing growth but an unexpected slowdown in services. This week, we expect monthly GDP growth for October to be a modest 0.1% rise, which would suggest that fourth-quarter growth is below that of the third quarter. Tomorrow’s labour market report is expected to show annual pay wage growth in the three months to October remaining at a 10-year high of 3.2%. The unemployment rate is also expected to highlight a tight labour market with a figure of 4.1%.
GBPEUR – 1.1140
GBPUSD – 1.2731
The coming week will also be significant for the European Central Bank. The ECB indicated in June that it was likely to end its asset purchase programme at the end of this year. The ECB is likely to confirm this at Thursday’s meeting. We also expect it to emphasise that policy remains highly accommodative. After talking about the data being ‘somewhat weaker than expected’, it is likely to comment again on the current situation. The ECB may well cut its economic growth and inflation forecasts and may downgrade its risk assessment.
On the policy front, it will continue to reinvest maturing asset holdings to maintain the present size of its balance sheet. However, there may be more detail on the likely composition of those reinvestments, including the implications of the new capital key which gives more weight to Germany and less weight to Italy and Spain. Market pricing of the first Eurozone interest rate hike has moved out significantly in recent months and a first increase is now not expected before April 2020. ECB President Draghi may acknowledge a risk that rates may stay lower for longer.
In the Eurozone, the German ZEW survey and the Eurozone PMIs will provide the first indications of December economic activity. We expect further declines in both, suggesting that the underlying pace of growth in the region remains sluggish. The EU Summit will round out the week, with the potential that further discussions around Brexit will take place after tomorrows Brexit vote in parliament.
EURUSD – 1.1430
EURGBP – 0.8980
US retail sales, CPI and industrial production data are likely to be closely watched by the Federal Reserve as global equity markets remained under pressure. 10-year Treasury yields have slipped to a three-month low given the uncertainty in equity markets. This follows from a weaker than expected US employment increase of 155,000. The unemployment rate held at 3.7% and wages grew 3.1% year on year.
We expect solid rises in US November estimates for retail sales and industrial production, consistent with continued strong GDP growth in the fourth quarter. Headline US CPI inflation is likely to have slowed in November due to the fall in the oil price, but core inflation may edge up to 2.2% year-on-year from 2.1%. These will be amongst the last key releases before the US central bank’s policy meeting on 19th December, which is set to see a key discussion on the outlook for US rates. Expectations remain that the Federal Reserve will raise rates for the last time this year.
GBPUSD – 1.2731
EURUSD – 1.1430
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*Interbank rates correct as at 7 am on the date of publishing