Poor monthly Gross Domestic Product data from November compounded sterling’s woes yesterday, as the pound dropped to fresh lows for the year against the US dollar, and its weakest levels against the euro since before December’s General Election. Gross Domestic Product contracted 0.3% in November, although over the past three months it was still up 0.1%. Manufacturing production collapsed a full 1.7% while the Index of Services fell 0.3% on the month. All the key numbers were far worse than expected. The figures should not have come as a surprise to anyone watching UK data however – surveys such as the Purchasing Managers’ Index made it clear the UK economy slowed significantly in November, as global risks and Brexit uncertainty compounded. The question now is if November’s dismal performance began to improve after the general election. Next week’s PMI survey data will, therefore, be of crucial importance for sterling, particularly with senior Bank of England officials signalling the possibility of a rate cut in the near future.


The euro remained static yesterday, amid thin data and news flow. However, trade tensions with the US have the potential to become a major topic for the single currency this week, as new Trade Commissioner Phil Hogan is in Washington this week to attempt to defuse tensions between the two economies. Given the Trump administration has completed NAFTA renegotiations and is expected to sign a trade truce with China tomorrow, there is a risk that the EU will begin to look like a soft target for another front in the trade war, given the relatively small size of US exports to the continent. The Trump administration is already considering punitive tariffs on French cheeses and champagne in retaliation for the nation’s digital tax, while US trade representative Robert Lighthizer has threatened investigations into multiple EU states.


The US dollar traded mixed overnight, with CNY the biggest gainer after signs of progress emerged from US-China trade talks. It really does seem like white smoke is rising from Washington as the US and China are closing a phase one trade deal, as the US officially lifted China’s designation as a currency manipulator. The reversal of last year’s decision to apply the label was described as being due to “enforceable commitments” to avoid competitive devaluation by Treasury Secretary Steve Mnuchin, suggesting that the phase one trade deal, which is expected to be signed tomorrow, includes such measures. The full agreement has yet to be released, and so some volatility can be expected should the text show a more limited or more comprehensive agreement than expected. Today’s US data features the NFIB small business index at 11:00 GMT, followed by Consumer Price Index inflation at 13:30.


The loonie traded flat yesterday, as markets focussed on the impending US-China trade deal and data flow was thin. Crude oil prices saw further declines, with WTI reaching fresh lows for the year, although this did not have a huge impact on CAD. The Bank of Canada’s business outlook survey was released, and on the whole showed a slight improvement in sentiment, with the composite gauge of business optimism rising to 0.74, the highest reading since 2018. The official commentary accompanying the report described business sentiment as “broadly positive except in the Prairies”, and noted that businesses seemed less concerned about trade tensions.




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