What’s been happening?

Pound Sterling – UK Markets 

On Wednesday, the British pound recovered the losses it recorded against the dollar since the start of the week while staying unchanged vs the euro. Nevertheless, today’s rebound was a product of a broad-based greenback weakness and the pound sterling is likely to stay fragile in the short-term. British Chancellor of the Exchequer Philip Hammond on Wednesday argued that Prime Minister Theresa May’s deal was the best one for the UK economy. “No-deal Brexit could still clearly happen. We have to prepare for such a scenario to minimise disruption,” Hammond added. In the meantime, German Finance Minister Scholz told reporters that Germany would have a “close but different” relationship with the UK post-Brexit. On a side note, Reuters reported that the European Court of Justice (ECJ) advocate general was likely to publish the opinion on Article 50 reversibility on December 4.  

Later in the day, the Bank of England in its Financial Stability Report warned that the worst case scenario, a disorderly Brexit, would result in an 8% fall in the GDP and cause the pound sterling to depreciate by as much as 25%. Assessing the other possible outcomes, "An unprepared shift to WTO trade rules would lead to 5.5% fall in GDP vs. current forecasts, "prepared" move to WTO rules would lead to 2.5% fall,” the BoE said. Summarizing the stress test results, the BoE explained that banks could withstand a no-deal, no-transition Brexit. “Banks have trillion pounds in liquidity to withstand three-months' freeze in funding markets. Banks could withstand many months of no access to the foreign currency market.” Commenting on the report, Governor Mark Carney reminded that the monetary policy could do little to offset potentially significant hits to productivity a no-deal Brexit could entail.

US Dollar – US Markets

In its second estimate, the U.S. Bureau of Economic Analysis kept the third-quarter GDP growth forecast unchanged at 3.5% as expected. “With this second estimate for the third quarter, the general picture of economic growth remains the same; upward revisions to nonresidential fixed investment and private inventory investment were offset by downward revisions to personal consumption expenditures (PCE) and state and local government spending,” the publication read. Although this report allowed the greenback to continued to gather strength against its major rivals and lifted the US Dollar Index to its highest level in two weeks, comments from FOMC Chairman Jerome Powell forced the currency to suffer heavy losses.

In his prepared remarks delivered at the Economic Club of New York luncheon, Powell, who in October said that they were a “long way” from neutral, shifted his tone on the policy outlook and said the policy rate was just below their estimates of neutral. Powell further stated that they were close to their price stability and maximum employment mandates and reiterated that there was no pre-set policy path and that they were monitoring the data very closely. 

Euro – European Markets

Following Powell’s dovish remarks, the euro rose against the dollar in the second half of the day. Similar to the pound sterling, however, the currency could struggle to extend its rally as the data from the euro area continue to show signs of an economic slowdown and the Italian budget problem remains unsolved. The latest report published by Germany’s Ifo Research Institue revealed that businesses in Germany hired at a slower pace in November than they did in October with the Employment Barometer falling to 103.5 from 104.6. “The sharpest decrease in the Employment Barometer was seen in the service sector. A growing number of service providers reported a more cautious attitude toward recruiting new staff, especially in the transport and logistics segment. The barometer decreased only slightly in trade and manufacturing, but companies in both sectors are still seeking to hire new staff,” the publication explained.

Commenting on the Italian budget crisis, the European Commission Vice-President Valdis Dombrovskis said that Italy and the EU were still far apart and added that Italy needed a significant correction on its budget proposal. On the other hand, Italy’s Deputy Prime Minister Luigi Di Maio repeated that the government wanted to have a dialogue with the EU over the budget but they would not betray the promises to their citizens. In addition, “Only by boosting confidence can Italy reverse market expectations. We are working to find a way to support economic growth in Italy as well as containing public finances,” Italian Economy Minister Tria told ANSA news agency.

What’s coming up? 

UK: The Bank of England will publish the consumer credit report, which includes net lending to individuals and mortgage approvals, on Thursday.

US: The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred gauge of inflation, personal spending/income and weekly jobless claims will be featured in the US economic docket. Later in the session, the FOMC is going to publish the minutes of its November meeting.

EU: The European Commission will release consumer confidence, service sentiment, industrial confidence and business climate data on Thursday. The European Central Bank will publish its Financial Stability Review and the Destatis will announce German inflation data, which is expected to tick down to 2.4% in November from 2.5%.