What’s been happening?

Pound Sterling – UK Markets 

As widely expected, British Prime Minister has survived the no-confidence vote on Wednesday. While speaking in the Parliament after the vote, PM May announced that they would start meeting with leaders as early as tonight and deliver a statement on Monday regarding the next steps. Following a muted market reaction to this development, the British pound closed the day virtually unchanged against the dollar while posting small gains vs the euro. 

While testifying on the Financial Stability Report (FSR) before the Treasury Select Committee (TSC), in London, Bank of Governor Mark Carney said that the pound sterling’s rebound yesterday showed that prospects of a no-deal had diminished. “Market view of Brexit vote most clearly expressed in the FX market,” Carney stated and added that he expected the volatility to in markets to continue. Meanwhile, commenting on the latest Brexit developments, Germany’s Ifo Institue’s President Clemens Fuest said that a hard Brexit with its huge costs must be avoided. “Both parties should now return to the negotiating table and modify the agreement so that it is acceptable to all sides. Anything else would be an unacceptable policy failure." 

Earlier in the day, the data published by the Office for National Statistics (ONS) showed that the core CPI ticked up to 1.9% on a yearly basis in December to surpass the market estimate of 1.8%. The Retail Price Index (RPI) edged down to 2.7% from 3.2% in the same period and the core PPI came in at 2.5%. 

US Dollar – US Markets

The U.S. Bureau of Labor Statistics on Wednesday announced revealed that import prices on a monthly basis in December declined by 1% to bring the annual changed to -0.6%. On the other hand, exports prices rose 1.1% on a yearly basis. Other data from the U.S. revealed that the National Association of Home Builders’ Builders Confidence Index improved to 58 in January from 56 in December. 

Later in the evening, the Fed in its Beige Book noted that economic activity expanded in 8 of 12 Fed districts in a modest-to-moderate pace. "Many districts reported contacts had become less optimistic due to increased financial market volatility, rising short-term interest rates, falling energy prices and elevated trade and political uncertainty," the publication read while reiterating that higher tariffs were causing input costs to increase. Regardless of the day’s macro data, the US Dollar Index fluctuated in a very tight range to reflect the markets’ indecisiveness.              

 Euro – European Markets

The euro weakened modestly against both the dollar and the pound sterling on Wednesday as investors couldn’t find a reason to pay attention to the shared currency. The harmonized index of consumer prices in Germany stayed unchanged at 1.7% on a yearly basis to fall in line with analysts’ estimates. In a speech delivered on Wednesday, ECB Governing Council member Francois Villeroy de Galhau said that the rate increase will be ‘extremely gradual’ and depend on the economic situation in the euro area. “The economic outlook is surrounded by uncertainty,” Villerroy added. Another Governing Council member,  Yves Mersch, argued that the economic fundamentals in the eurozone were unchanged and a slowdown in the activity did not necessarily mean that the economy was falling into a recession.

What’s coming up? 

UK: There won’t be any macroeconomic data releases from the UK on Thursday and markets will remain focused on the political developments. 

US: Weekly initial jobless claims and Philly Fed Manufacturing Survey will be featured in the U.S. economic docket on Thursday.   

EU: The Eurostat will publish its inflation report, which is expected to show a 1% increase in the annual core CPI in December.