What’s been happening?

Pound Sterling – UK Markets 

The British pound snapped its four-day winning streak against the dollar on Tuesday as the latest Brexit headlines weighed on the currency, which recorded losses vs the euro as well. The government lost a key vote to change the budget legislation that would limit ministers' tax raising powers under a no-deal scenario by 303 vs 296.

Earlier in the day, while speaking in Mali during a visit to Defense Forces personnel, Irish Prime Minister Leo Varadkar said that the European Union was willing to give fresh, written assurances about the nature of the Northern Ireland backstop. Meanwhile, in an interview with BBC Radio, Brexit Secretary Barclay confirmed that the Parliament vote on PM May’s Brexit deal would take place next week and added that some MPs were open to changing their mind on the deal. Regarding a possible extension to Article 50, Barclay noted that he had no discussions with the EU on that matter. Despite these optimistic remarks, however, the British pound struggled to extend its recovery on Tuesday as other Brexit-related headlines painted a more gloomy picture.

Germany’s Foreign Minister Maas told reporters that a no-deal Brexit scenario was still an option and further elaborated by saying that a hard border in Ireland was still the fundamental concern. Additionally, Irish Foreign Minister Simon Coveney reiterated that there was no pressure to change their position on the border. Finally, responding to a question about whether or not the EU would provide more assurances to Britain on Brexit, French Minister for European Affairs, Nathalie Loiseau, said that there was nothing more than the EU could to at this point. 

 US Dollar – US Markets

The NFIB on Tuesday announced that the Small Business Optimism Index in December edged down to 104.4 from 104.8 in November. Commenting on the report, “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects, said NFIB President and CEO Juanita D. Duggan. “Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth,” Duggan added. Other data from the U.S. revealed that job openings declined to 6.9 million in November from 7.13 million in October. Finally, the Fed reported that the consumer credit increased at a seasonally adjusted annual rate of 6.75% in November.

Despite the mixed data, the dollar outperformed its rivals and the US Dollar Index retraced a large part of Monday’s losses as markets turn their attention to the FOMC’s December meeting minutes, which is scheduled to be released on Wednesday.      

 Euro – European Markets

The shared currency weakened vs the greenback but was able to outperform the pound sterling. The data published by the European Commission on Tuesday, once again, showed that sentiment in the euro area continued to deteriorate with business climate, economic sentiment indicator, industrial confidence, and services sentiment indexes all retreating in December from their November levels and falling short of market expectations. The consumer confidence index, which stayed unchanged at -6.2 in the same period, was the only data to match analysts’ estimates. Furthermore, the Destatis announced that industrial production in Germany contracted by 1.9% in November following October’s 0.8% decline.

Meanwhile, the Munich based Ifo research Institute published an article on the euro area economic performance and said that downside risks, including Brexit, escalating trade wars, and the vulnerability of emerging markets, were expected to increase. “Economic activity in the euro area is slowing down. In Q42018 and the first two quarters of 2019, the economy is only expected to grow by 0.3% respectively, according to the latest forecast by the three research institutes Ifo (Munich), KOF (Zurich) and Istat (Rome),” the publication read. “The effects of the US Federal Reserve's normalisation of monetary policy on the world economy remain difficult to assess.”

What’s coming up? 

UK: The NIESR will publish its GDP estimate on Wednesday. Bank of England Governor Carney is scheduled to speak at an event at 15:30 GMT. 

US: FOMC members Bostic, Evans, and Rosengren will be delivering speeches before the FOMC releases the minutes of its December meeting later in the evening. 

EU: Trade balance and current account data from Germany and the unemployment rate, which is expected to remain unchanged at 8.1% in November, from the euro area will be featured in the European Economic docket on Wednesday.