What’s been happening?

Pound Sterling – UK Markets 

Following yesterday’s heavy sell-off, the British pound recovered a portion of its recent losses against its rivals and recorded modest gains vs both the greenback and the dollar during the European trading hours. However, the currency failed to preserve its momentum and came back under pressure in the second half of the day as there were no fundamental developments to support today’s rebound. Earlier on Tuesday, European Commission President Jean-Claude Juncker repeated that the Brexit deal on the table was the only deal and that there wouldn’t be a reopening of the withdrawal agreement. Shortly after, Irish Prime Minister Simon Coveney stated that there was potential for a new statement or declaration from the EU on the backstop to help reassure the UK parliament if need be. Coveney further added that a no-deal Brexit was still unlikely but they were actively preparing for that scenario. Later in the day, British Prime Minister Theresa May’s Spokesman announced that the government was planning to bring the deal back to the Parliament for a vote before January 21.

In its December Labour Market Report, the Office for National Statistics revealed that the unemployment rate stayed unchanged at 4.1% in three months to October to match analysts’ estimates. Additionally, the claimant count change came in at 21.9K in November to miss the market forecast 13.2K. On a positive note, average earnings, both including and excluding bonuses, rose 3.3% in the same period. “There were an estimated 8.66 million people aged from 16 to 64 years who were economically inactive (not working and not seeking nor available to work), 95,000 fewer than for May to July 2018 and 195,000 fewer than for a year earlier,” the ONS noted.

Meanwhile, in an article published on Tuesday, the Ifo Institue for Economic Research called for a re-negotiation of the Brexit agreement. "This must be done to prevent the deal from failing. The deal also has to be acceptable to the UK," noted Ifo expert Gabriel Felbermayr. "In this respect, the EU Commission's statement that the current situation is "the best deal and the only possible deal" is not correct," added the Director of the Ifo Center for International Economics.

US Dollar – US Markets

The NFIB’s Small Business Optimism Index fell to 104.8 in November from 107.4 but remained close to its record high set in October. Commenting on the report, “Small business owners are enthusiastic about the economy and have demonstrated their optimism by raising wages, creating new jobs, and investing in their businesses throughout 2018,” said NFIB President and CEO Juanita D. Duggan.

Other data from the U.S. on Tuesday revealed that the core Producer Price Index, which excludes volatile food and energy prices, increased 0.3% and 2.7% on a monthly and yearly basis, respectively, in November to beat the market estimates. After spending the first half of the day under a moderate pressure, the US Dollar Index gained traction and advanced to its highest in two weeks supported by the upbeat data and rising Treasury bond yields. 

 Euro – European Markets

The shared currency was virtually unchanged on a daily basis vs the British pound while extending its slide against the greenback for the second day in a row. The monthly sentiment survey published by the ZEW showed that the Indicator of Economic Sentiment for Germany and the euro area improved to -17.5 and -21 in December from -24.1 and -22 in November, respectively. The assessment of the current economic situation in Germany, however, fell to 45.3 from 58.2 in the same period. Assessing the findings, “Although the rise in economic expectations is a welcome one, it should not be over-interpreted. The assessment of the economic situation has worsened dramatically for both Germany and the Eurozone,” said ZEW President Professor Achim Wambach. “This is indicative of relatively weak economic growth in the fourth quarter. In addition, uncertainties also remain in terms of the looming international trade dispute and Brexit, which have a particularly negative impact on private investment and Germany’s exports.” 

Ahead of his meeting with the European Commission President Jean-Claude Juncker on Wednesday, Italian Prime Minister Conte reiterated that he was hopeful talks with the EU will be successful. On the other hand, economy minister Giovanni Tria said that the government was trying to avoid the EU’s infringement procedure but was not going to make any major changes to the budget. “The Government may lower cost of new measures for welfare, fiscal targets may be revised,” Tria concluded.

What’s coming up? 

UK: There won’t be any macroeconomic data releases from the UK on Wednesday. 

US: The U.S. Bureau of Labor Statistics will publish the November inflation report. The Consumer Price Index (CPI) is expected to retreat to 2.2% from 2.5% recorded in October. 

EU: The only data featured in the European economic docket will be the industrial production.