GBP/USD

EU reached a deal with Italy

The European Commission reached a deal with Italy over the country's 2019 budget that avoids an EU disciplinary procedure against Rome, Commission Vice President Valdis Dombrovskis said. He added the decision could be revised in January if Rome did not fully apply the agreement reached with Brussels. Under the compromise, Italy has lowered its headline deficit for next year to 2.04% of output from 2.4% it had planned earlier.

The more important structural deficit, however, which excludes one-off items and business cycle swings, will not change in 2019 from 2018 levels. Under EU rules, Rome was supposed to reduce the structural deficit by 0.6% of GDP, but instead proposed in its original 2019 draft budget an increase of 1.2% according to the Commission. The compromise at zero change was not ideal, Dombrovskis said, but allowed the Commission to drop plans to start disciplinary action that could end up in fines.

Slowdown in UK CPI

British consumer prices rose at an annual rate of 2.3% in November, the lowest since March 2017, in line with market consensus and down from 2.4% in October.

The biggest monthly fall in petrol prices in more than three years was the biggest driver of slower consumer price inflation, reflecting a sharp fall in the cost of a barrel of oil.

British consumers have been pressured by inflation since June 2016's Brexit referendum triggered a fall in sterling. A year ago, inflation peaked at a five-year high of 3.1%.

But despite the fall in inflation since, and a pick-up in headline wage growth to its highest in a decade, businesses have reported a downturn in consumer spending in recent months.

The British Chambers of Commerce forecast on Tuesday that economic growth this year and next would be the slowest since the country was last in recession in 2009.

Earlier this month the Bank of England sketched out a worst-case no-deal Brexit scenario in which sterling would plunge to parity against the U.S. dollar, inflation would exceed 6% and the economy contract by 8%.

Fed to raise rates and lower rate projections

The Fed will likely raise its target rate by another 25bp to a range of 2.25-2.50% today. This would be the fourth hike this year, the most since 2006. The interest paid on excess reserves, IOER, will most likely be raised by only 20bp in order to bring the effective fed funds rate back to the middle of the target band.

The updated Summary of Economic Projections should show similar economic and inflation projections for the coming three years to those forecast in September. The FOMC members’ rate projections, however, will likely be lowered and indicate a shallower path than before. In particular, we expect the dots to signal only two hikes for 2019 (down from three), and the dots for 2020/2021 might each come down by 25bp as well. The main reasons for the more cautious rate outlook are, in our view, tighter financial conditions as well as concerns about the outlook.

U.S. President Donald Trump has repeatedly berated the Fed and on Tuesday said in a Tweet it was "incredible" for the central bank to even consider tightening given global economic uncertainties.

Comments by Fed Chairman Jerome Powell in late November that the key interest rate was “just below” neutral, a level that neither brakes nor boosts the economy, have bolstered investor expectations that U.S. central bank is nearing a pause on its monetary tightening.

British Prime Minister Theresa May postponed a parliamentary vote on her Brexit deal to seek more concessions but the European Union refused to renegotiate and lawmakers doubted her chances of winning big changes.

May's abrupt move less than 30 hours before parliament was to vote opens up a range of possibilities from a Brexit without a deal, a last-minute agreement or another EU referendum.

Admitting she faced defeat on Britain's potentially biggest political and economic shift since World War Two, May was laughed at by some lawmakers when she said there was broad support for key aspects of her deal reached with the EU last month. However, "If we went ahead and held the vote tomorrow, the deal would be rejected by a significant margin," she told parliament of the agreement she clinched after 18 months of tortuous negotiations.

With her position in jeopardy, May said she would now go back to the EU and seek reassurances over the so-called Irish "backstop", an insurance policy to ensure no return to a hard border on the island of Ireland.

The EU reacted coolly, with European Council President Donald Tusk saying it was ready to discuss how to smooth ratification, but that neither the withdrawal agreement nor the Irish backstop would be renegotiated.

"As time is running out, we will also discuss our preparedness for a no-deal scenario," Tusk said. Brexit will be discussed at a previously scheduled EU summit on December 13-14.

Germany's Foreign Minister Heiko Maas said there were no possibilities to amend Britain's 585-page withdrawal deal and Irish Prime Minister Leo Varadkar said preparations for a no-deal Brexit should intensify.

May indicated she was seeking further assurances from the EU on the working of the backstop and would seek to give the British parliament more power over its application to satisfy sovereignty demands.

Federal Reserve Vice Chairman for Supervision Randal Quarles said that interest rates are approaching neutral, but the concept of neutral rate can be less useful after the economic conditions become more normal.

Fed officials estimate the neutral rate of interest is from 2.5 to 3.5%, according to Quarles. Asked if Powell meant rate hikes would end sooner rather than later, Quarles said it was not clear about exactly how much further interest rates would rise.

"Where we will end up in that range will depend on the data we receive and our assessment of the performance of the economy over the course of next year," he noted.

Neutral interest rate, a notion that is driving the Federal Reserve' s attitude towards the normalization of U.S. monetary policy, means a level neither stimulative nor restrictive to the economy.

"I think that it can be a useful concept in helping guide monetary policy, but it's not terribly precise," Quarles said.

It may be changing over time, and "its utility as the central organizing thought around how you are conducting monetary policy becomes less."

"Because we are nearing other time where and we're moving back into a normalize monetary policy, that what's really important is that the Fed Reserve have a clearly communicated strategy, about monetary policy and that we execute on that strategy in a way that's predictable and transparent," said the Fed official.

The remarks came after Jerome Powell, chairman of the Fed, said last Wednesday that interest rates are "just below" the broad range of estimates of the level that would be neutral for the economy. Market participants interpreted that as a dovish signal for future rate hikes, compared with his previous remarks in early October that rates were "a long way" from neutral.

Fed raised its benchmark interest rate for the third time this year on September 26 and made the target range between 2% and 2.25%. At that time, Fed policymakers indicated another hike in December, three more in 2019 and probably one more in 2020.

MyFXspot.com is an independent macroeconomic consultancy with thousands of subscribers all over the world. We provide fundamental research to help our clients make better investing decisions. Our subscribers should expect to get access to:

1Trading ideas (entry, take profit, stop loss)

Forex: EURUSD, GBPUSD, USDJPY, USDCAD, AUDUSD, NZDUSD, EURGBP, EURJPY, EURCAD, GBPJPY, AUDNZD, AUDJPY

Precious metals: GOLD, SILVER

Stocks: S&P 500, DAX, SHANGHAI COMPOSITE

Commodities: WTI OIL

This is a sample publication:

2Investment Clock - great quantitative tool for investors

Different asset classes sectors tend to perform better than others at different phases of the economic cycle. We estimate current phase of the economic cycle and the Investment Clock shows which asset classes have historically outperformed in current phase of the economic cycle according to our research.

3Essential market news, technical and fundamental analysis, reviews of central bank decisions

We provide you regular commentaries on important economic and market issues and events, previews and forecasts of forthcoming data releases resulting from our knowledge, experience and quantitative tools.

4Last but not least

We describe fundamental factors, discuss recent changes in trends, resort to numerous quantitative tools and much more. You are able to take a close look at how we come to our conclusions and decide whether you share our current opinion regarding the market, but at the end of the day, it is you who decides what to do with your capital. That is why we strongly recommend you to conduct your own research and always rely on common sense – nobody knows what might work out for you just as you do.

Monthly

Subscription

$49.90

 
You can cancel at any time
CONTINUE

Quarterly

Subscription

$119.70

per month: $39.90
You can cancel at any time
CONTINUE

Annual

Subscription

$238.80

per month: $19.90
You can cancel at any time
CONTINUE

VAT tax will be added for EU individuals.

Cron Job Starts