Global Themes

Big day ahead could prove choppy for Sterling   
- Will BOE optimism boost the pound? 
- Government voted down on Brexit
- Dovish tone dampens Fed hike 
- Draghi to control expectations

BoE

Following last month’s historic first rate hike in a decade, the Bank of England’s (BOE) final meeting of the year at 12:00pm today is expected to remain low key in comparison.

Consensus expectation is that all 9 members of the Monetary Policy Committee (MPC) will vote to keep interest rates unchanged at 0.50%. The minutes of the meeting will also be released at 12:00pm and should shed more light on the MPC’s stance on the future path of monetary policy in the UK.

The decision to raise interest rates last month was widely expected but the “dovish” communication of only two to three hikes over the next three years meant Sterling plunged 1% against most major currency peers that day. GBP/USD currently floats around 4-cents higher since then, atop $1.34 and could re-test $1.35-$1.36 today if there is a more optimistic tone on rate rises next year. GBP/EUR could attempt a run above €1.14 and possibly extend towards €1.15.

The breakthrough in Brexit talks last week is expected to help put in place a transition period for the UK leaving the European Union (EU) and avoid the risk of a cliff-edge when the UK is set to leave in 2019. BOE Governor Mark Carney has repeatedly voiced the importance of this and a final trade deal to be agreed, which would support the Bank in possibly raising rates at a faster pace and help boost the pound.

Brexit

In addition to the BOE today, Prime Minister Theresa May heads to Brussels for the final EU summit of the year.

The build up to the event has been a rollercoaster ride for Sterling as conflicting information regarding the progress of the talks between the UK and EU so far, has left the pound subject to erratic price moves. Sterling has fallen as low as $1.33 against the USD this month and into the €1.11-€1.12 range against the Euro.

The optimism of further progression in negotiations today has been somewhat tainted by the overshadowing defeat of Mrs May’s government in parliament last night. British lawmakers voted in favour of an amendment to demand parliament get a meaningful vote on the final Brexit deal at the end of negotiations in March 2019. Effectively, lawmakers now have the power to veto the withdrawal treaty if they don’t like the terms. This reduces the chance of a no deal Brexit and should support the pound.

However, it does not put Mrs May in a strong or stable position going to Brussels today and continues to put pressure on her position and the stability of the Conservative party. Although the pound has strengthened overnight, political uncertainty is likely to hinder further gains.

Fed

The Federal Reserve (Fed) raised interest rates by 25bp increasing the band to 1.25-1.50% as expected last night and the economic forecasts (dot plot chart) continued to signal 3 interest rate hikes next year and a further 2 in 2019.

Market participants sold off the dollar after the unchanged forecasts seeing this as a dovish rate hike by the Fed. Alongside this, two members voted against the interest rate hike last night. As a result, the dollar weakened off to the $1.34 level against Sterling, and back into the €1.18 level against the Euro.

The Fed are not buying into US President Donald Trump’s tax cut package, Fed chair Janet Yellen suggested last night in her last press conference that policymakers see Mr Trump's tax plan having a modest and mostly short-term impact. “It’s not a gigantic increase in growth” said Ms Yellen (source; Bloomberg).

ECB

The European Central Bank (ECB) meet today, with a press conference to follow at 1:30pm.

Any further changes to policy are unlikely, with the reduction of the quantitative easing programme having already been announced for 2018 and no appetite being shown for a rate increase at the moment. Euro strength might be impacted by President Mario Draghi and potential comments on what could happen at the end of 2018. There have been some calls from within the ECB to start to end the bond buying programme, which would then potentially lead to rate rises.

Mr Draghi has been reluctant to give such a hawkish view, mindful of how strong the Euro already is this year, but investors have had a habit of making their own interpretations of his remarks. Manufacturing and services PMI data are both released at 9:00am – both are expected to show a slight reduction from November’s release though this seems unlikely to move GBP/EUR from its entrenched €1.13 level in early trading.




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