Last week the main focus was on two news events in particular, UK/EU trade talks and the ECB meeting. Starting with the later, the ECB (European Central Bank) made no changes to interest rates at the latest policy meeting with the main refinance rate unchanged at 0.0% and in line with market expectations. The ECB announced that the PEPP bond-buying programme would be increased by a further €500bn with the scheme extended for a further nine months until March 2022. Central Bank President Lagarde stated that the decision on bond purchases was nearly unanimous and that the full amount of bond purchases would not necessarily be used. However, during the press conference the currency failed to weaken as the bank raised the 2022 GDP growth projection to 4.2% while inflation is set to remain below the target through the next three years.
In the meantime, Brexit dealt another dish of déjà vu as trade talks were once again extended from the self-imposed soft deadline. During the week we saw sterling weaken as unease grew as the probability of “no deal” reached 50%. On Sunday, the European Union and the UK agreed to keep trade deal negotiations going beyond the latest deadline. A call between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen added fresh impetus to the push to get a deal done, with the pair saying the two sides will go the “extra mile.” The show must go on.
COVID-19 cases globally continue to escalate. Germany will go into a hard lockdown on Wednesday, with non-essential stores to close, employers urged to shut down workplaces and school children encouraged to stay at home. The country has struggled in the second wave of the virus and is lagging many of its neighbours in keeping infection rates under control.
As we enter the last full week of the year the way the UK trades with the EU remains unresolved whilst the despite COVID-19 vaccines it can’t be ignored that cases continue to grow. From a currency perspective, this means we could see some volatile movement as traders square up position up for the year before the Christmas holidays.
- German industrial production
The week starts off quietly in terms of economic data but is likely to be dominated by the ongoing UK/EU trade talks as the market deciphers the respective position of the two camps. In the meantime the German industrial production numbers are due.
- UK employment data
- US Empire manufacturing
The UK employment data is set for release and unfortunately the central bank’s prediction of raising unemployment is set materialise once again. The UK’s unemployment is set to rise to 5.2% from 4.8% with the claimant count naturally increasing at the same time. Across the pond, the US Empire State manufacturing (New York) and is expected to remain low as COVID concerns in the state grow.
- UK/EZ and US Flash Manufacturing
- UK/EZ and US Flash Services
- US Retail sales
- FOMC Meeting
A busy day for data as the first reading of manufacturing and service indexes are released from the UK, US and EZ. These index highlight whether the pace that respective sectors have expanded or contracted from the previous month and therefore a good indicator of economic conditions. However, given the backdrop the market will be focused on the FOMC meeting. The Fed also seems most likely to leave monetary policy unchanged for now, particularly given the renewed hope of more fiscal stimulus. However, US Treasury Secretary Mnuchin’s decision not to extend most of the Fed’s emergency lending facilities past the end of the year and some slowing of US data have led to some speculation that the Fed may take some action.
- BoE monetary policy meeting
- US weekly jobless claims
The BoE meeting could be pivotal for Sterling but its tone may also be at the mercy of UK/EU trade talk developments. At last month’s meeting the BoE’s Monetary Policy Committee made a decision to raise its asset purchases. It seems likely that there will be no further policy changes for now, despite the further rise in Covid-19 cases and weakening of UK economic data. Brexit adds another layer of uncertainty, even if the Brexit outcome is clear before Thursday, the MPC may still want to wait to assess market reaction and economic developments in January before taking any further policy action. However, they may note the ongoing risk and potential impact on their economic forecasts.
- UK retail sales
- German IFO survey
UK retails sales are expected to have declined by close to 4% for the month of November which is no real surprise given the lockdown, although this may be offset by black Friday and the growth of online sales. In the meantime, German IFO data is set for release. This is a composite index based on surveyed manufacturers, builders, wholesalers, services, and retailers and highlight the current and the 6-month view of business conditions. Given the tightening of restrictions in Germany it wouldn’t be a surprise to see weaker current conditions but considering the advancement in vaccines this maybe offset by the 6-month view.
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