What’s been happening?

Pound Sterling – UK Markets 

The British pound recorded decisive gains against the euro on Friday and extended its recovery vs the greenback to finish post weekly gains for the third straight week. However, the currency is unlikely to stage a long-lasting recovery pressured by disappointing macroeconomic data and Brexit uncertainties.

Although the final reading of the IHS Markit’s December Services PMI came in at 51.2 to beat the market expectation of 50.7, the details of the report, which highlighted that the business confidence in the service sector slumped to its second-lowest level since 2009 and the job creation was at its slowest pace in more than two years, painted a gloomy picture. Commenting on the data, “The service sector typically plays a major role in driving economic growth, but is now showing worrying signs of having lost steam amid intensifying Brexit anxiety,” said Chris Williamson, Chief Business Economist at the IHS Markit. Other data from the UK showed that the total amount of net lending to individuals fell to £4.4 billion in November from £5 billion in October with both consumer credit and mortgage approvals readings recording declines in the same period.

On Brexit-related headlines, Reuters reported that according to a recently conducted survey, 59% of 1,215 Conservative Party members opposed Prime Minister Theresa May’s deal compared to the 38% who favoured it. Later in the day, Irish Prime Minister Leo Varadkar told reporters that he still expected a Brexit deal in coming weeks.

US Dollar – US Markets

After the U.S. Bureau of Labor Statistics announced that the total nonfarm payrolls increased by 312,000 in December to surpass the analysts’ forecast of 177,000 by a wide margin, the dollar gathered strength against its major rivals. “In December, average hourly earnings for all employees on private nonfarm payrolls rose 11 cents to $27.48. Over the year, average hourly earnings have increased by 84 cents or 3.2%,” the BLS further added in its publication. However, the dollar’s rally lost steam a couple of hours later as FOMC Chairman Powell adopted a dovish tone while speaking at a conference organised by the American Economic Association in Atlanta.

“The Fed will revisit the basance sheet program if reductions cause problems in markets,” Powell said and added that the FOMC was always prepared to shift the monetary policy stance. Touching on the turbulence in stock markets, Powell noted that financial markets were sending downside risk signals. The US Dollar Index, which tracks the dollar against a basket of six currencies, quickly lost its traction following these remarks and closed the week in the negative territory. On the other hand, stock markets cheered Powell’s shift in his stance and all three major indexes in the U.S. added more than 3% on a daily basis on Friday.      

Meanwhile, the IHS Markit on Friday reported that the Services PMI eased to 54.4 in December from 54.7 in November. Assessing the data, “Service sector business activity grew at a reassuringly solid rate in December, though like the manufacturing economy has seen the pace of expansion moderate somewhat since the strong rates enjoyed earlier in the year,” said Chris Williamson, Chief Business Economist at the IHS Markit.     

Euro – European Markets

The shared currency struggled to find demand on Friday as the latest inflation report forced investors to question the ECB’s policy outlook. According to the Eurostat, the annual CPI dropped to 1.6% in December from 1.9% in November and missed the experts’ estimate of 1.8%. The core CPI, which excludes volatile food and energy prices, stayed unchanged at 1% in the same period. Furthermore, the IHS Markit’s Composite PMI at 51.1 in December recorded its lowest reading in more than four years. “The eurozone economy moved down another gear at the end of 2018, with growth down considerably

from the elevated rates at the start of the year. December saw business activity grow at the weakest rate since late-2014 as inflows of new work barely rose,” Chris Williamson, Chief Business Economist at the IHS Markit, noted.

What’s coming up? 

UK: There won’t be any macroeconomic data releases from the UK on Monday and markets will stay focused on Brexit headlines. 

US: The ISM’s Non-manufacturing PMI report will be watched closely by the participants. Later in the session, Atlanta Fed President Raphael Bostic will be delivering a speech. 

EU: Sentix Investor Confidence, and retail sales data from both Germany and the euro area will be featured in the European economic docket.