There has been a shift in Prime Minister May’s rhetoric in favour of extending Article 50. The Labour Party’s move to back a second referendum without a ‘no deal’ option also overtook this week’s key events. Mrs May confirmed that the second ‘meaningful’ vote will take place by 12th March potentially with related subsequent votes on 13th and 14th. An earlier date may yet be sought by the Government. News headlines and expectations of the market, have focused on the prospect and length of an extension and the support from parliament to avoid a ‘no-deal’ situation. As a result GBP has strengthened modestly over the course of the week with Bank of England Governor Carney warning against a no-deal, no-transition situation.
The February set of UK PMI surveys for Construction and Services are released early this week. The manufacturing number on Friday was in line with the consensus falling to 52.0. This is in line with earlier sentiment indicators and suggests that business confidence continues to be hit by political uncertainty as stock building continues. Even though there has been a more positive tone around avoiding ‘no deal’, the manufacturing number showed ongoing stockpiling to account for potential supply-chain risks. In the week ahead numbers, we predict services PMI to remain weak, just above 50.
GBPEUR – 1.1639
GBPUSD – 1.3229
The ECB meeting will be one of the most closely watched events this week. Given the soft fourth quarter GDP number and lower than expected ‘core’ CPI, the ECB is likely to be more bearish on the bloc’s GDP and inflation for the next few years. On its policy rates, we think it is likely that the prior guidance will be retained. That is that rates would stay unchanged ‘at least through the summer of 2019’. Given market pricing for the next hike, focus will likely instead concentrate on other upcoming issues such as a potential plan to replace their targeted long-term refinancing operations (TLTRO). As it stands, the four-year financing operations started in June 2016 will begin to drop out of some regulatory measures of bank liquidity. This is of particular concern for banks where TLTRO accounts for a high proportion of total assets, particularly in Italy and Spain. ECB minutes confirmed that with the scheme’s upcoming redemption, alternatives may need to be reviewed, but little specific detail has been provided. It is possible that further information on options to replace it may not be given until the April meeting.
Ahead of the ECB meeting on Thursday, there is some further data of interest, with ServicesPMI on a country and Eurozone basis. Overall, growth is expected to have fallen, but still remain just above the expansionary 50 level. Retail sales, Employment and fourth quarter GDP growth may all show slight increases ahead of the central bank meeting.
EURUSD – 1.1366
EURGBP – 0.8592
With the US delaying the imposition of tariffs on imports from China, trade negotiations are anticipated to continue. Core points of contention between the US and China remain, but President Trump seems incentivised by the stock market’s recent solid performance to find something positive. Noises out of the meetings have been encouraging with regards to a potential deal and a future meeting between the US and Chinese leaders. Nevertheless, President Trump’s cutting short of the Hanoi Summit with North Korea confirmed his unwillingness to accept a deal which does not meet his own requirements. It is likely that Chinese officials will be reading into this ahead of future meetings.
US labour market data will, as usual, attract a great deal of attention. This week, Fed Chair Powell’s semi-annual testimonies to US Congress stressed that the US economy remained strong in spite of growing external risks. Meanwhile, delayed fourth quarter GDP numbers showed above-consensus growth. Against this backdrop, the labour market numbers will be scrutinised to see if the underlying economy continued to grow robustly through the first quarter. Last month’s number showed a notable rise in non-farm payrolls of 304,000. Expectations for February’s numbers are for a more modest rise of 185,000. An above-consensus result would confirm that, domestically at least, US growth remains robust. Given the more measured rhetoric from the FOMC and the likelihood that 2019 growth will slow noticeably versus last year, the Fed may hike rates just once this year.
GBPUSD – 1.3229
EURUSD – 1.1366
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*Interbank rates correct as at 7 am on the date of publishing