What’s been happening?

Pound Sterling – UK Markets 

The British pound weakened against both the dollar and the euro on Wednesday. The data published by the UK’s Office for National Statistics on Wednesday showed that the inflation as measured by the Consumer Price Index (CPI) rose 0.2% on a monthly basis in November to bring the annual rate down to 2.3% from 2.4% recorded in October. Further details of the publication revealed that the core CPI, which excludes volatile food and energy prices, ticked down to 1.8% on a yearly basis. “The largest downward contributions to change in the 12-month rate came from falls in petrol prices and across a variety of recreational and cultural goods and services, principally games, toys and hobbies, and cultural services,” the ONS explained. Additionally, the Producer Price Index (PPI) and the Retail Price Index (RPI) rose 2.4% and 3.2%, respectively, to match market estimates.

Additionally, the Confederation of British Industry published its latest monthly CBU Industrials Trends Survey on Wednesday. Summarising the findings, “The UK's manufacturing sector enters the Christmas period with a small upswing, with output growth gathering further pace. The firming in exports orders is also particularly welcome,” said Anna Leach, CBI Head of Economic Intelligence and added: “But uncertainty over Brexit still casts a long shadow over this sector and the rest of the economy. Politicians must finally stop the endless infighting and come together to secure a workable solution, or we're in danger of edging closer to a no-deal Brexit.”  

Meanwhile, assessing British Prime Minister Theresa May’s spokesman’s comments about how they were ramping up the no-deal Brexit preparations, Reuters reported that the British government was expected to start telling business and citizens to prepare for the risk of leaving the European Union without an agreement. “Plans include setting aside space on ferries to ensure a regular flow of medical supplies and keeping 3,500 armed forces personnel ready to support the government with its contingency plans,” Reuters wrote. 

US Dollar – US Markets

The U.S. Bureau of Economic Analysis reported that the current account deficit rose to $124.8 billion in the third quarter from $101.2 billion in the second quarter. A separate report showed that existing home sales rose 1.9% on a monthly basis in November to beat the market expectation for a 0.6% decline. Nevertheless, markets largely ignored these data releases and the greenback weakened against its rivals ahead of the Federal Reserve’s announcements. 

As expected, the FOMC decided to hike its benchmark interest rate by 25 basis points to the target range of 2.25% - 2.5%. In the policy statement, the Committee changed its language on the policy outlook and said “some further gradual increases” in the policy rate will be consistent with the sustained economic expansion and the strong labour market. Additionally, the updated economic projections showed that the FOMC reduced the number of expected rate hikes in 2019 to two from three while announcing that the vote for the rate increase was unanimous.

Despite these changes, however, the dollar gathered strength in the evening boosted by the FOMC Chairman Jerome Powell’s remarks during the press conference. While responding to a question regarding the balance sheet, “The run-off of the balance sheet has been smooth and has served its purpose, and I don’t see us changing that,” Powell said. Furthermore, Powell downplayed the recent volatility both in the bond and stock markets and reiterated that the economy was expected to continue to grow in a healthy pace in 2019 and that the Fed didn’t need to be accommodative in the current state. 

 Euro – European Markets

The shared currency couldn’t stay resilient against the dollar but was able to record modest gains vs the pound sterling. The Eurostat on Wednesday announced that the construction output in the euro area contracted by 1.63% on a monthly basis in October to bring the annual growth rate down to 1.8% from 4.8%. Other data showed that the Producer Price Index (PPI) in Germany remained steady at 3.3% on a yearly basis in November. 

Confirming yesterday’s reports, the European Commission vice president, Valdis Dombrovskis, in a press conference said that the deal had been reached on the 2019 budget proposal with Italy. Dombrovskis further added that although the solution on the budget was not ideal, Italy could avoid disciplinary steps by fully implementing agreed measures. Later in the day, Italy’s Interior Minister and Deputy Premier Matteo Salvini told ANSA news agency that Italy could veto the EU budget as it stands.  "As it stands, with cuts to agriculture and fishing funds, it will not get our vote," Salvini said. "With the spotlight out on the Italian budget, the chapter of the European budget opens. I answer the European commissioners who say Italian accounts will stay under their control, that it will be the Italian government that will keep the European budget under control.”

What’s coming up? 

UK: The UK’s Office for National Statistics will release November retails sales data on Thursday. Later in the day, the Bank of England will announce its interest rate decision, which is expected to stay unchanged at 0.75% and publish its monetary policy summary. 

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

EU: The European Central Bank will release October current account data on Thursday.