Fed lowers dots and props up G10 gains this morning.

December 20, 2018

GBP

Sterling remains relatively static in light of calming Brexit volatility. The number of future avenues the Brexit process can go down remains high, but it looks like Parliament is packing up for Christmas early. Yesterday saw the release of Novembers Consumer Price Index measure of inflation, which did little to move sterling as Brexit uncertainty still looms. The release came in bang on expectations at 2.3% and signals the beginning of a sharp fall in inflation as the drop in energy prices begins to filter through to the consumer. It is expected that the Energy sub-category of CPI will fall 0.4 percentage points in December and then a further 0.2 percentage points in January. Today the Bank of England meet for the final time before the festive period begins, but little further information is likely to be given and Mark Carney will likely hammer home the consequences of a disorderly Brexit.

EUR

The euro seemed to have definitely caught that feel-good holiday season spirit as it made advances yesterday for the third day in a row versus a basket of global currencies, while it is on the offensive this morning as well. The main driver for this seems to be the outstretched hand of Italy towards European budget commissioners, as the Italian government reconciles itself with a 2019 budget deficit that is lower at 2% than the 2.4% initially intended. However, the largest chunk of this lower deficit is caused by postponing certain cost-heavy policy measures, not by abandoning them altogether. This procrastination stands a good chance of coming back to haunt the Italians in 2019 and 2020, especially as growth prospects for the Eurozone seem to be dimming on the short run. For now, this doesn’t seem to spoil the festive mood and the truce struck between Italy and the European Union yesterday can be enough to spur a minor euro rally towards the end of the year.

USD

Before the Federal Open Market Committee meeting yesterday, expectations on the viewpoints of the Fed were diverse, a situation that surprisingly hasn’t changed much after the meeting as markets are still trying to make up whether they saw a relatively hawkish, or a relatively dovish FOMC yesterday. Markets were positioned for a very dovish Fed, but as the Rate Statement was more upbeat than expected, USD rallied, although it came under pressure again this morning. Both the inflation and growth forecasts for 2018 and 2019 were adjusted downwards, while a shift in the dot plot now suggests the median voter will vote for only two rate hikes in 2019 instead of three. However, future markets still continue to price in less one rate hike in 2019, which implies the Federal Reserve may catch markets by surprise again in 2019 if they follow through upon their current intentions of two rate hikes. Markets will have some time to digest the implications of the Fed decision of last night with only the Philly Fed Manufacturing Index at 13:30 GMT and the CB leading index at 15:00 as the most notable data releases.

CAD

Loonie, loonie, loonie, loonie, ahhhhh – cried investors after the loonie continued to carve fresh lows. Even this morning, where the US dollar has gone fairly bid against the G10, the loonie has failed to find any impetus to claw back some ground. The oil market remains a bleak sight for the Canadian current account too, with a barrel of crude sitting around the $47 a barrel mark. Crude futures have failed to rally this morning too despite a weakening dollar, evidencing how dramatic the oversupply in the market really is. Yesterday saw the release of November’s CPI data too, which confirmed the Bank of Canada’s dovish stance as it surprised to the downside at 1.7% – substantially lower from October’s 2.4% and sits below target. The data calendar is sparse for Canada today but livens up tomorrow with the release of GDP data and the BoC business outlook survey.

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