Expectations for higher U.S. rates ease

Investors have revised down sharply their expectations for monetary tightening in the US over the past month, amid a weakening of inflation expectations and worries about global growth, to the extent that they are barely discounting one hike in the whole of 2019. As such the USD has lost ground against the EUR and JPY, even as Brexit is continuing to handicap GBP. Last week’s November US employment data maintained the sense of caution about the Fed, even though it was probably not enough to change the likelihood of a hike at the 19^th December FOMC meeting. Payroll data for November showed a softer pace of jobs growth, but the unemployment rate was steady at 3.7% and hourly earnings were still firm at 0.2% m/m and 3.1% y/y. Clearly it will be the messaging from Jerome Powell about the future path of rates that will be crucial for the markets next week, and following that it will be all down to the data. Until then it is possible that the USD will remain under pressure as yield spreads are currently providing EURUSD in particular a bit more underpinning. Whether this can be sustained beyond a few days remains unclear though, especially as the ECB meeting this week may also deliver a more dovish message, and the Fed may also be less dovish than imagined when they finally meet.

The other key issues in the coming week revolve around Brexit as well as ongoing risk aversion related to US-China trade talks, made more complex by the political stand-off over the arrest of the Chinese corporate executive. The highlight of course will be the UK Parliament’s vote on Theresa’s May’s Brexit agreement with the EU on Tuesday. The chances of it being passed on the first attempt are very low, so it will be the scale of the defeat that will matter to markets. A narrow loss might allow May to save some face to fight again, and perhaps to negotiate a few amendments to get it passed on a second vote. However, a heavy loss could bring down her leadership and make the Brexit process appear in chaos which in the first instance would likely see the pound lose further value. Whether these losses are sustained, however, will depend on what happens next.

Weekly currency movement vs USD(%)

Source: Emirates NBD Research, Bloomberg

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