News & analysis


Soggy sentiment surrounded sterling yesterday as no progress appears to be made in the process of getting any Brexit deal through Parliament, as the ‘meaningful vote’ of next week draws ever more near. Despite that, this morning the Great British Pound has risen itself onto a stronger footing, after 20 Tories disobeyed the party’s whip and voted along with a Labour proposal that limits the powers of the Exchequer to cut or raise taxes in case of a ‘no deal’ Brexit scenario. Downing Street and hard Brexiteers did play down the importance of this measure, although Labour leader Jeremy Corbyn was quick to counter and emphasize that this does make a ‘no deal’ outcome less attractive. The perceived reduction in the likelihood of a hard Brexit explains why sterling rallied this morning. The most likely scenario for now seems that Theresa May will lose the vote next week, however, she will try to limit the size of the defeat which should enable her to make a second push for getting her deal approved with some minor tweaks later.


After making strong advances against USD on Monday, faith in the single currency reversed yesterday after the German Industrial Production for November gravely disappointed, increasing the odds of a technical recession in Europe’s biggest economy. The Industrial Production figure showed a contraction in output of 1.9% and a downwards adjustment of October’s reading, while a small growth for November was actually expected. Unless we see an earth shattering turnaround for December’s data, these figures indicate the German Manufacturing sector has actually slipped into a recession in the second half of 2018. A combination of capacity constraints and distortions of the US-China trade war are blamed for this. Today we see Unemployment data at 10:00 GMT.


The greenback did not have its best session yesterday, after the NFIB survey indicated a decline in the small business optimism to its lowest level in 14 months. However, most of the attention centred on a televised nine-minutes presentation of Donald Trump, where he reiterated the necessity of raising funds for the border security wall. In a pledge to win support from the public opinion, the President blamed the Democrats for the ongoing federal government shutdown, the second longest in the US history. Despite the fact this fight seems far from reaching its end, at least some of the market´s nerves were calmed after this address, as emergency power was not invoked by the President for now. Risk-on moves followed in the equity and commodity markets, also supported by the positive tones coming from the US-China trade talks. Today, new lights could be shed on Federal Reserve monetary policy debate as the interest rate setting Federal Open Market Committee minutes from the December meeting are released at 19:00 GMT.


The loonie lead the G10 currency board yesterday in a positive day for increasing oil prices, underpinned by global trade optimism, and softer than expected tones in Donald Trump’s address over the “security crisis” at the southern US border. Today is set to be another interesting day for the currency, as the Bank of Canada announces its interest rate decision at 15:00 GMT, followed by the Monetary Policy Report update and Governor Poloz press conference. In the last meeting on December 5th, the BoC kept its policy rate unchanged while offering dovish tones on “additional room for non-inflationary growth”. Market pricing for Canadian rate hikes are far below the two rate hikes that seem to be justified by the current level of inflation and labour market tightness, which implies the risks are tilted towards a hawkish surprise in this afternoon’s communications when markets adjust their positioning.