- EU release 'no deal' plans
- Inflation numbers dominate calendar
- Brexit scenarios: awaiting that EU concession
- Pound-to-Euro rate @ 1.1112 today, Pound-to-Dollar rate @ 1.2623 today
Image © cherryandbees, Adobe Stock
1) Inflation Data Demands more Bank of England Rate Hikes
UK inflation read at 2.3% in November according to the ONS, down from 2.4% in October, ensures another month of inflation being above the Bank of England's 2.0% target.
On a month-on-month basis inflation grew 0.2% in November, up from 0.1% in October. The core inflation rate read at 1.8%.
All numbers met the expectations of markets and therefore the impact of the data on Sterling has proven to be minimal in short-term timeframes, but we believe the data points to a stronger Pound in 2019.
The data suggests the Bank of England has little room to manoeuvre, and with wages on the increase the market's expectation for one interest rate to take place in 2019 looks like a significant underpricing. Inflation should soon start ticking further away from the 2.0% target.
"In principle, if wage growth continues to outperform then the Bank of England will be keen to continue hiking rates in 2019 - potentially much earlier than markets currently anticipate. However, this relies on a workable Brexit solution being found," says James Smith, Economist with ING Bank N.V. in London.
If the EU-UK Brexit deal is passed by parliament then we would expect the Bank of England to feel more comfortable with signalling more interest rate rises and which should prove to be an engine for Sterling appreciation in 2019.
However, Andrew Wishart, UK Economist with Capital Economics is not convinced there will be any upside traction in prices to worry about just yet, noting a 30% fall in sterling-based oil prices since their recent peak which should ensurethe fall in inflation in November is probably the precursor of a larger fall in December, perhaps to the 2% target.
Wishart argues there were only limited signs of the acceleration in wage growth in September and October in the CPI figures. "The upshot is that with inflation still subdued, despite signs of increasing inflationary pressure in the labour market, the MPC will be able to stay on the sidelines until it is clearer how Brexit will pan out," says the analyst.
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2) Brexit: That EU Concession is the Next Trigger
Brexit scenario analysis remains a key determinant on plotting the Pound's path forward.
We know Theresa May's negotiators are still working with Brussels who will likely announce a last-minute concession in time for the Brexit vote which is scheduled for the week of January 14; and we maintain the view that everything hinges on satisfying the government's Northern Irish allies, the DUP.
May knows any concessions that can get the DUP on side will be enough to satisfy many of her Conservative party MPs opposed to the deal.
The big trigger therefore remains the announcement of any concessions from the EU that can win over the DUP. If the DUP can be brought on side we reckon the Pound would rally sharply as markets start to price in May's vote passing parliament.
Assuming the government fails to pass its Brexit deal in January, we would imagine a vote of no confidence in the government will be tabled by the opposition Labour Party.
There is only one scenario in which the motion would pass: If Conservative party 'remainers' believe collapsing the government would prevent a 'no deal' Brexit taking place.
(The Northern Ireland's DUP have stated they will support the government in the event of May's deal failing, they will however withdraw support should May's deal pass in its current format).
Therefore recent threats made by MPs Anna Soubry, Nick Bowles and Sarah Wollaston to resign their positions in the Conservative party should the government commit to a 'no deal' in the event of May's deal failing in parliament must be taken seriously. We would imagine a cabal of Conservatives voting against their party would be able to make the no confidence motion pass, which would ultimately lead to parliament being dissolved.
3) Gauging Sterling's Buying Power
With Sterling markets entering a relatively stable period of trade, we can get a good steer on where retail markets are offering rates on the Pound.
For those making international transfers we believe high-street banks are offering a Pound-to-Euro exchange rate in the region of 1.0825-1.0950. Independent specialists will be closer to the market, likely offering in the region of 1.1014-1.1058.
Looking at the Pound-to-Dollar exchange rate, we would expect high-street banks to be offering levels in the region of 1.2340-1.24, while independent specialists are likely to be offering rates in the region of 1.2550-1.26.
4) EU Release No-Deal Guidelines
The EU have this morning released a series of guidelines on the steps to be taken by the bloc in the event of a 'no-deal' Brexit.
The European Commission says it would ensure that UK citizens legally residing in the EU on the date of withdrawal would continue to be considered legal residents.
The Commission says it would allow a 12 month equivalence period for OTC derivative contracts and a 24 month equivalence for central depositaries services.
It would allow 12 months for equivalence for central clearing of derivatives.
Measures will also be adopted to avoid interruption of air traffic.
5) CBI Industrial Trends Report Shows Improvement
The CBI Industrial Trends survey - out at 11:00 GMT - showed factory orders for UK industry grew for a second month in a row in December after a sharp slowdown in October with a reading of 8 being delivered against expectations for a reading of 6.
According to the CBI, an improvement in export orders helped deliver the better-than-forecast outcome.
A measure of expectations for the three months ahead rose to +14, its highest level since September.
"The UK's manufacturing sector enters the Christmas period with a small upswing, with output growth gathering further pace. The firming in exports orders is also particularly welcome," says Anna Leach, an economist with the CBI.
"But uncertainty over Brexit still casts a long shadow over this sector and the rest of the economy," she said.