What’s been happening?

Pound Sterling – UK Markets 

The British pound erased all the gains it recorded against the dollar on Monday and stayed resilient vs the euro. Spanish Prime Minister Pedro Sanchez on Tuesday told reporters that they would vote against the Brexit deal at its current state unless the text on Gibraltar was amended. Responding to Spain’s concerns, the EU in an official statement said issues raised by Spain on the text were covered by the mandate and that the EU was working very closely with all the member states. Meanwhile, British Supreme Court announced that it turned down the application to appeal case over whether Article 50 could be unilaterally reversed.

Testifying before the British Parliament’s Treasury Select Committee, Bank of England Governor Mark Carney said that the BoE had no intention to provide an additional analysis of a no-deal Brexit scenario and declined to comment on the probability of a disorderly withdrawal. Commenting on the policy outlook, Carney explained that the implied volatility in the British pound was very high and was expected to remain that way for the next month while adding that they could consider a rate hike if GBP devaluation were to create further excess demand. Additionally, BoE policymaker Michael Saunders told the Committee that the economic growth was likely to slow down in the fourth quarter of the year and in the first quarter of 2019 and reiterated that the monetary policy implications of Brexit outcome could go either way. Finally, BOE deputy governor Jon Cunliffe stated that forward-looking indicators were largely reflecting Brexit uncertainties and added that the outlook would be materially affected by the Brexit outcome. 

According to the latest monthly CBI Industrial Trends Survey (orders), manufacturing output growth increased at a more robust pace in November than expected with the headline activity index improving to 10 in November from -6 in October. Assessing the findings, “It’s encouraging to see an improvement in the manufacturing sector after October’s stark survey, with order books and output growth on the up. But the future prosperity of manufacturers depends on getting the Brexit deal right. The overwhelming message from business to the Government is to make progress, don’t go backwards,” Rain Newton-Smith, CBI Chief Economist, said.

US Dollar – US Markets

After suffering heavy losses against its peers on Monday, the dollar staged a decisive recovery on Tuesday. Although there were no fundamental drivers behind the greenback’s rally, the selling pressure surrounding major European currencies caused the market demand to shift in favour of the buck. According to the monthly report published jointly by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts in the U.S. increased by 1.5% in October following September’s 5.5% fall.

Moreover, the Federal Reserve Bank of Philadelphia announced that the business activity in the regional non-manufacturing sector expanded at a more robust pace than expected in November with the headlines general activity index improving to 42.4 from 37.4. “The firm-level index of general activity, new orders, and sales/revenues all rose above last month’s readings. In addition, the employment indicators remained positive, while the indexes for prices paid and prices received both increased,” the publication read.

Despite today’s impressive rebound, however, Wall Street’s unstoppable fall could force the Fed to adopt a dovish stance regarding the monetary policy outlook in 2019 and limit the dollar’s gains. Nevertheless, unless investors are convinced that Brexit and Italy problems are close to being resolved, the dollar is likely to stay strong against European currencies. 

Euro – European Markets

Ahead of the European Commission’s decision on Italy, the shared currency suffered losses vs both the pound sterling and the dollar. Commenting on the Italian budget crisis, German Finance Minister Olaf Scholz said that the euro area budget concept was backed across the EU and Italy must deal with the reality of the euro area rules. The data published by the Destatis on Tuesday showed that the Producer Price Index (PPI) in Germany increased 0.3% and 3.3% on a monthly and yearly basis, respectively, and both readings came in line with market expectations.

In a prepared speech on Tuesday, the European Central Bank’s (ECB) Banking Supervision Head Danièle Nouy said that geopolitical risks intensified and the increase in sovereign bond yields in Italy was an unwelcome development. “The profitability of the euro area’s significant institutions remains subdued,” Nuoy added.

What’s coming up? 

UK: The Office for National Statistics will publish the public sector net borrowing data. Additionally, British Prime Minister Theresa May will be meeting the European Commission's President Jean-Claude Juncker to discuss the draft agreement text.

US: Weekly initial jobless claims, existing home sales, durable goods orders, and the UoM’s Consumer Confidence Survey will be featured in the US economic docket on Wednesday.       

EU: The European Commission will announce its decision on Italy on Wednesday. Moreover, the European Central Bank will have a non-monetary policy meeting.