- Ongoing Brexit deliberations will be the main focus of market participants during the week as key deadlines approach and no clear deal has emerged – two-way volatility in the British Pound should remain high.
- The US government shutdown has sidelined many key economic data releases, including Friday’s December US Durable Goods Orders, and it’s possible that the Q4’18 US GDP report the following week is delayed as well.
- The European Central Bank meeting on Thursday could bring about a slight dovish adjustment to policy in light of the destabilization in inflation expectations.
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All Week | -- GMT | GBP Brexit Negotiations Ongoing Ahead of January 29 Deadline
UK Prime Minister Theresa May has presented her ‘Brexit Plan B’ to parliament and reactions have been tepid at best. It seems that the prime minister’s renewed effort to get her deal through the House of Commons differs little than her first attempt, and by judging from the reaction of parliamentarians, it seems doubtful that ‘Plan B’ will pass muster either if a vote is held by the January 29 deadline. Reports over the weekend indicated that UK PM May might attempt to renegotiate the Good Friday Agreement, a politically fraught endeavor that would undoubtedly add a new matrix of complexity to an already overbearing Brexit problem.
At this point, if a no deal, ‘hard Brexit’ is to be avoided, it would appear that an extension beyond the March 29, 2019 deadline may be necessary. However, with the European parliamentary elections due up in July, it’s doubtful any extension to the Brexit deadline would go beyond there. Late on Monday, cross-party talks produced a bill designed to thwart a no-deal, ‘hard Brexit’ scenario by forcing PM May to postpone Brexit if no deal were reached by February 26.
01/22 Wednesday | 21:45 GMT | NZD Consumer Price Index (4Q)
Q4’18 New Zealand inflation data are due to reflect the prevailing trend across the developed economic world, where the late-2018 energy market crash has had a significant negative effect on topline inflation figures. Quarterly price pressures are expected in flat after having gained +0.9% in Q3’18, while the yearly reading is due in at +1.8% from +1.9%. As such, inflation is set to remain below the RBNZ’s medium-term target of +2%,leaving little opportunity for 2019 rate hike expectations to tighten in any meaningful way. Currently, rates markets are leaning more towards a rate cut than a rate hike this year: there is a 30% chance of a 25-bps rate cut by June 2019.
01/23 Wednesday | --:-- GMT | JPY Bank of Japan Rate Decision
Continuing its three-decade battle with deflationary pressures, the Bank of Japan has yet to find success with getting topline inflation readings back to its medium-term target of +2%; the December National Japanese CPI report came in at +0.7% (y/y). After the decline in energy prices since the start of October, disinflation is likely to persist in the near-term; per the most recently made available data from 2013, Japan imports 96% of the energy it uses (prior to the nuclear reactors being brought back online post-Fukushima).
Overall, Japanese economic data has started to turn the corner, with the Citi Economic Surprise Index running higher for the past four weeks (currently +6.6 from -15.7 on December 21, 2018). Even though the Bank of Japan isn’t the source of market indigestion right now – traders can thank the US government shutdown, Brexit, the US-China trade war, among others – it’s still going nowhere fast with its monetary policy. The resulting impact on the Japanese Yen should be minimal.
01/24 Thursday | 00:30GMT | AUD Employment Change & Unemployment Rate (DEC)
After a strong November (+37K), Australian employment is due to have increased by +18K in December. With the unemployment rate set to hold at 5.1%, the Reserve Bank of Australia is simply looking for more evidence that the labor market remains a source of stability, particularly as wage growth remains weak and topline inflation pressures are starting to come down all over the developed world (see: energy market collapse). Like its antipodean counterpart, the RBA is very much stuck in neutral when it comes to policy expectations for the first half of the year: according to overnight index swaps, there is only a 13% chance of a change in policy by June 2019 and a 28% chance of a 25-bps cut by December 2019.
Pairs to Watch: AUD/JPY, AUD/NZD, AUD/USD
01/24 Thursday | 12:45 GMT | EUR European Central Bank Rate Decision
The latest batch of inflation data from the Eurozone proved to confirm concerns that the sharp decline in energy prices since the start of October was having a significant negative impact on price pressures. With the final December Eurozone CPI report showing topline inflation of +1.6% y/y, it’s difficult to think that ECB President Draghi and the Governing Council will be of the mindset that their four criteria for ending their ultra-loose monetary policy will be met. In particular, reality has disappointed the expectation that “inflation will be durable and stabilize around those levels with sufficient confidence.”
There are two sides to the inflation debate when the ECB meets this Thursday. As mentioned earlier, inflation expectations have been destabilized over the past few months, but the trend is especially pronounced over the past year: the 5-year, 5-year inflation swap forwards peaked in January 2018 at 1.774%; they finished last week at 1.553%. However, with energy prices rebounding in recent weeks – Brent Crude is up by +16.5% over the past month – inflation expectations have stabilized in tandem (the 5-year, 5-year inflation swap forwards are only down by -1.5-bps over the past month).
On balance, we expect these developments to give the ECB reason to soften its tone this coming Thursday. Whereas ECB President Draghi has previously suggested that a rate hike could materialize sometime around “summer 2019,” there is ample evidence to suggest that this event horizon will be pushed back by a few months. It seems doubtful that the Governing Council would want to make any prognostications beyond the end of this calendar year, it still being the first month of 2019 but also due to the fact that Draghi’s term expires in October. The ECB may very well keep a rate hike for 2019 on the table – for now.
Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at email@example.com