Post date: 09/12/2019 09:02

The dollar had a rough go of it last week, ending down against every G10 currency and most major emerging market currencies. The surprisingly strong jobs report on Friday brought only a modest relief bounce in the greenback. Poor German factory data held back the Euro, and Sterling put in yet another impressive performance as the clock ticks towards the general election and the Tory double digit lead on the polls persists. Latin American currencies led the pack. The Chilean peso has now recovered about half of its losses since the unrest began.

Political developments take front and centre this week. The General Election in the UK on Thursday will be key for Sterling. Additionally, the December 15th deadline for scheduled US tariff hikes in Chinese products looms. We expect some theatrics around the deadline ending with a postponement of the tariff increases. Together with a Tory victory on Thursday, this means next week should be a positive one for risk assets and in particular Sterling. The Federal Reserve meeting on Wednesday should make it clear the Fed is on hold for the foreseeable future. By contrast, the ECB meeting Thursday is unlikely to yield market-moving information.


The unexpected bounce in the UK PMI indices of business activity, albeit to still low levels, was roundly ignored by a market focused on election polls. The tentative Labour bounce in the polls we saw last early week seems to have petered out, and the Tories still hold a double digit lead on the poll average. Should these polls be confirmed on election night, we expect a significant rally in Sterling.


There were good economic news early in the week, as the Eurozone PMI indices of business activity were revised up modestly, pushing back further the prospect of a recession. This optimism was dented on Friday by a very weak report on German industrial production, which indicated that the sharp construction in German manufacturing is not yet over. The ECB meeting on Thursday will give little additional information, as President Lagarde continues to press core Europe to loosen their fiscal policy.


A slate of weak second-tier data releases earlier in the week were roundly dismissed by markets after a quite strong US jobs report on Friday. Work creation continues to be healthy, unemployment is edging down further, and we are seeing solid real wage gains without any sign of worrisome inflationary pressures. This is an ideal environment for equity and risk assets in general, and US equities rose to close the week around their all-time high. We expect the FOMC meeting outcome to be consistent with a Fed solidly on hold, which should have a very limited on currency trading.