Sterling traded somewhat higher yesterday and overnight, as members of Parliament voted for an election on December 12th. The vote broke a deadlock over the date of the election, which was widely expected by financial markets – hence the lack of reaction in sterling. The platforms of the major parties, particularly as it pertains to Brexit, will retain some importance for the pound, as will the potential prospect of large scale intervention in the economy by a Labour Government. Big changes in polling performance may still cause further Brexit related volatility. For now, however, the risk of no-deal Brexit and the high sterling volatility it has created over recent months is likely to recede, bringing economic data back into focus.
The euro rallied marginally yesterday as the dollar traded mixed across the session. This morning’s euro data has marginally surprised to the upside with both Spanish and regional German CPI releases showing minor upticks. The big data releases come at 10:00 GMT with the Eurozone confidence indices released and at 13:00 BST with the release of Germany’s preliminary CPI data for October. The euro also has room to rally given a dovish surprise from the Federal Reserve tonight.
G10 FX traded in a subdued range yesterday, as markets awaited today’s momentous US data and central bank decision. The calendar will start with ADP’s estimate of monthly Gross Domestic Product at 13:15 GMT, which is likely to be a non-event in light of the far more significant first release of quarterly Gross Domestic Product data at 13:30. The sharp deterioration seen in some recent US survey data, such as ISM’s Purchasing Managers Index, will hang over today’s release, for which the median Bloomberg forecast is currently for an annualized quarterly rate of 1.6%, lower than the broad post-crisis trend growth of around 2%. Later in the afternoon, the Federal Reserve’s latest rate decision will be announced at 18:00 GMT. A 25 basis point rate cut is highly likely, and widely expected by markets, but the guidance accompanying the rate decision will be highly influential on expectations of the next two quarters for the Fed. So far Fed guidance has not envisaged a deep cutting cycle, unlike fixed income markets, which have priced in significantly more cuts. If the Fed intends to pause after tonight’s decision to take stock of incoming data and developments in the US-China trade war, it will have to at least temper expectations of further easing.
The loonie pared recent gains yesterday as investors began to cover short positions in USDCAD with a huge day scheduled today. Firstly, US Q3 GDP will set the scene for a volatile afternoon at 12:30 GMT, with the Bank of Canada’s rate decision following shortly after at 14:00 GMT. The BoC is widely expected to keep rates unchanged and with the market fully pricing in the rate decision, as with the Federal Reserve meeting tonight, all eyes will be on the tone of the commentary and any forward guidance. The Bank of Canada may be forced into an insurance cut in the coming meetings, most likely in Q1 2020 if it were to occur. Any signal by Governor Poloz today that a rate cut is likely in the coming quarter or so will prompt loonie weakness despite the divergence in short-run policy rates. For that reason, the tone of the statement and press conference is key for USDCAD this afternoon. However, the domestic economy doesn’t warrant such a stance without another material downturn in external conditions. If the markets have predicted today’s central bank announcements correctly, the loonie will become the highest yielding G10 currency in nominal terms – something that has been priced into front-end US-Canada yield spreads since October 10th. Shortly after the BoC announcement, the market turns its eyes to EIA US crude inventories report. Last week saw inventories fall by 1.7m barrels, helping oil rally $1.7 a barrel over the course of the session. Oil has been on the back foot this week despite positive signs coming from US-China trade negotiations as demand concerns still weigh on oil traders’ minds. Another fall in US inventories may help extend any loonie rally occurring from a neutral BoC, or stem losses if the rate statement signals a more dovish decision than expected. Then at 15:30 BST, Governor Poloz steps up to give a press conference following the monetary policy announcement. Again, the tone of the press conference is key for markets predicting the upcoming monetary policy meetings. To finish off the day for USDCAD, the Federal Reserve is due to announce rates at 18:00 GMT.