Post date: 16/12/2019 13:01
Every major news of an eventful week went the right way for financial markets and risk appetite. The Tories' crushing victory in the UK general elections lifted Sterling and British assets, and the news of an initial deal between the US and China on trade added to the general optimism. The Federal Reserve appears to be firmly on hold after its December meeting, and the overall result was a general rally of every major currency save the Yen against the US dollar.
Next week promises to be a busy one in currency markets. The key flash PMI indices of business activity in the Eurozone come out Monday. Thursday we will see the Bank of England reaction to the new political landscape after the UK election. Finally, Friday we'll see some important inflation data out of the US. We expect generally positive releases that may well continue to lift Sterling on one hand and emerging market currencies on the other throughout the week.
The pound rallied after the historic Tory victory on Thursday's election on relief that the withdrawal agreement may finally pass Parliament. This does not fully remove the uncertainty over the future relationship between the UK and the EU, which remains to be negotiated before a December 31st, 2020 deadline. However, the large Tory majority probably means that any agreement reached by Johnson’s government will be able to pass Parliament. We now expect the Bank of England to upgrade its assessment of the UK economy's future path, which may well provide a modest further impulse to the Pound before year end.
The ECB under Lagarde's leadership appears to be inching close to our own relatively optimistic view of the Eurozone economy. At its December meeting, macroeconomic projections were revised slightly upwards. However, we think President Lagarde struck a distinctly optimistic tone in her press conference. The tentative resolution of the US China trade conflict can only add to this sense of optimism. We expect forward looking confidence indicators like the PMIs to surprise to the upside. Further, the apparent turn of the German economic establishment towards a more tolerant view of fiscal stimulus is yet another positive for the Euro going forward.
The Federal Reserve made it clear at its December meeting that it is firmly on hold, and that the bar for an interest rate move in either direction is fairly high. The China-US agreement on a first phase of a trade agreement makes it even more unlikely that we see a cut any time soon. Meanwhile, the continued absence of inflationary pressures makes hikes unnecessary. Steady US monetary policy and improving news flow in Europe and worldwide is in our view a positive environment both for the Euro and emerging market currencies. Continued gradual rises in both appears to be the most likely theme of currency markets in 2020.