What’s been happening?

Pound Sterling – UK Markets 

The monthly report published by the UK’s Office for National Statistics (ONS) on Tuesday showed that the employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.5% in three months to September while the unemployment rate was 4.1%, a little above the analysts’ estimate of 4%. “Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.2% excluding bonuses, and by 3.0% including bonuses, compared with a year earlier,” the ONS further stated in its publication. Finally, the claimant count rate ticked up to 2.7% from 2.6%. With investors staying focused on Brexit headlines, the market reaction to the data was muted during the day.

While speaking to reporters, British Foreign Minister Jeremy Junt repeated that 95% of the Brexit deal was completed but it was difficult to know when the remaining 5% would be agreed upon. On the other hand, British Brexit Secretary Raab, who is preparing to lead a group of Cabinet ministers who want the EU to drop its demands over the Irish backstop, said that a no-deal would be preferable to the alternative being currently offered by the EU. Commenting on the uncertainty surrounding Brexit talks, “No one is fooled by this theatre. Delay after staged managed delay. A deal will be reached and it will mean surrender by the UK,” former British Foreign Secretary Boris Johnson tweeted out on Tuesday. “We will be doomed to remain in the customs union and under Brussels’ regulatory control. People did not vote for colony status,” Johson argued.  

Later in the day, RTÉ News' Europe Editor Tony Connelly reported that the EU and UK negotiators have agreed on a text that deals with the Irish border. “The backstop will come in the form of a temporary UK-wide customs arrangement, with specific provisions for Northern Ireland, which go deeper on the issue of customs and alignment on the rules of the single market than for the rest of the UK," Connely said. Shortly after, Downing Street announced that the Cabinet would meet at 2 PM on Wednesday to discuss the draft agreement. Although these headlines helped the British pound gather strength against its rivals, the gains stayed limited as British politicians quickly voiced their opposition against the draft deal.    

US Dollar – US Markets

The NFIB’s Small Business Optimism Index fell to 107.4 in October from 107.9 in September and fell short of the market expectation of 108. Meanwhile, in its monthly Survey of Consumer Expectations report, the Federal Reserve Bank of New York said that consumers’ Income and spending growth expectations strengthened in October while short- and medium-term inflation expectations stayed unchanged. “Median one-year-ahead earnings growth expectations fell from 2.8% in September to 2.5% in October, just below its trailing 12-month average of 2.6%,” New York Fed added.

There were no other macroeconomic data releases from the United States on Wednesday and the increasing demand for European currencies forced the dollar to retrace a portion of its latest rally and the US Dollar Index, which tracks the greenback against a basket of six major currencies, snapped its 4-day winning streak.             

Euro – European Markets

As expected, the October CPI (final) in Germany stayed unchanged at 0.2% and 2.5% on a monthly and yearly basis, respectively. The sentiment report published by the Zentrum für Europäische Wirtschaftsforschung (ZEW) showed that the Current Situation Index in Germany slumped to 58.2 in November from 70.1 in October and fell short of the market forecast of 65. “The figures for industrial production, retail sales and foreign trade in Germany all point towards a weak development of the German economy in the third quarter,” the ZEW noted. On the other hand, the Economic Sentiment Index improved to -24.1 from -24.7 in Germany and fell to -22 from -19.4 in the euro area. “The expectations of the survey participants for the coming six months do not show any improvement. This means that, at the moment, they do not expect to see a speedy recovery of the currently weak development of the economy,” the publication read.  

Touching on the policy outlook in his keynote speech delivered at UBS' European Conference in London, the ECB chief economist Peter Praet said that their policy would remain predictable and they would proceed in a gradual pace. “The underlying strength of the Euro area economy continues to support confidence that inflation convergence towards ECB target will happen,” Praet added. Although Praet noted Brexit and Italy were difficult issues to be resolved, he said economic conditions would have to deteriorate very substantially to envisage going to non-conventional measures.

What’s coming up? 

UK: The UK’s Office for National Statistics will publish its October inflation report that includes Retail Price Index, Consumer Price Index, and Producer Price Index on Wednesday. Markets expect the annual core-CPI, which excludes volatile food and energy prices, to rise to 2% from 1.9%. A softer-than-expected growth in inflation is likely to weigh on the British pound as it would allow the BoE to adopt a more cautious approach with regards to gradual rate hikes. More importantly, markets will be paying a close attention to the Cabinet meeting on Brexit deal.

US: The U.S. Bureau of Labor Statistics will release the October CPI data. Although this data is unlikely to impact December rate hike expectations significantly, a large divergence from market expectations could cause volatility in the dollar-denominated assets.      

EU: Real GDP growth figures from Germany and the euro area alongside with eurozone industrial production and employment change data will be featured in the European economic docket on Wednesday.