Christmas Election Confirmed to Break Brexit Deadlock

Sterling holds steady as a December election is confirmed; the FOMC are set to cut for the third straight month; US GDP in focus

Previous Day's Market Highlights

A Christmas election; it's on.

The UK will head to the polls for a general election on Thursday 12th December after Parliament passed a one-line Bill legislating for the polling date in an attempt to break the ongoing Brexit deadlock. For those fond of statistics, this will be the first winter election since 1974, the first December election since 1923, and the fourth national vote (either election or referendum) in the last five years. MPs voted by 438 to 20 in favour of holding an early poll, though the likely result was known some time before the vote after all major opposition parties gave their backing to an election throughout the day. With an election now confirmed, Parliament will dissolve shortly after midnight on Wednesday 6th November at which point the campaign formally begins.

The election campaign is, of course, likely to centre on the UK's departure from the EU. The Conservatives will likely stand on a manifesto of leaving with the recently negotiated Withdrawal Agreement; Labour will likely campaign for negotiating a new deal, before putting it to a public vote; the Liberal Democrats plan to revoke Article 50; while the Brexit Party will push for a 'clean break (i.e no deal) Brexit. While they should be taken with a healthy pinch of salt, current opinion polling puts the Conservatives (37%) around 13 points ahead of Labour (24%), with the Liberal Democrats and Brexit Party polling 17% and 11% respectively. Shifts in opinion polling and public sentiment will now begin to have a greater impact on sterling, as market participants attempt to predict the outcome of the election.

Turning to the pound, today's political developments had little immediate impact. Despite a brief trip above the $1.29 handle, sterling ended the day unchanged against the dollar, while also settling flat against the euro. Nonetheless, the balance of risks appears to be tilted to the downside, with election uncertainty set to mount in the coming weeks. 

Markets, more broadly, were relatively quiet on Tuesday, with market participants likely apprehensive ahead of this evening's FOMC policy decision. Nervousness ahead of the decision resulted in the dollar treading water, shedding 0.1% against a basket of peers, with the greenback also pressured by softer than expected consumer confidence data. October's index rose to 125.9, 2 index points softer than expected, indicating that consumer confidence remains subdued; suggesting slower consumer spending, and a hit to economic growth in the coming quarters.

Elsewhere, contradictory trade headlines meant risk assets struggled for direction, with both the Aussie and Kiwi dollars settling broadly unchanged. Early reports indicated that President Trump would meet his Chinese counterpart on November 17th to formally sign phase one of a Sino-US trade deal; however these headlines were later clarified by comments that a deal may not be signed, but that "progress is being made". Essentially, the situation is little changed from where the day began.

Overnight, Japanese retail sales surprised to the upside, increasing by 7.1% MoM in September, evidencing a surge in consumer spending in advance of this month's consumption tax increase. Meanwhile, Australian third quarter CPI data produced no surprises, showing prices increasing by 0.5% QoQ, and 1.7% YoY.

Away from FX, equity markets on both sides of the Atlantic struggled. In Europe, the pan-continental Stoxx 600 shed 0.2%, while the US benchmark S&P 500 closed unchanged. Finally, oil prices diverged as expectations of a rise in US inventories increased. Global benchmark Brent ended the day unchanged, while US WTI crude settled 0.5% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1585 1.1661 1.1086 4.93%
GBP/USD 1.2875 1.3012 1.2195 6.28%
EUR/USD 1.1115 1.1179 1.0940 2.14%
GBP/AUD 1.8750 1.9094 1.8076 5.33%
GBP/NZD 2.0275 2.0559 1.9311 6.07%
GBP/CAD 1.6850 1.7095 1.6253 4.93%

Today's Market Highlights

Today looks set to be a rare occasion where geopolitical developments are likely to take a back seat, and monetary policy decisions come to the fore.

Of most importance for markets, and for the global economy, will be this evening's Federal Reserve decision, with the FOMC set to announce a 3rd straight 25bps rate cut, bringing the target range for the Fed Funds Rate to 1.50% - 1.75%. The rationale for today's rate cut, which is fully priced in by markets, is likely to be similar to the previous two; namely providing the US economy with additional 'insurance' against increasing downside risks - particularly those stemming from ongoing US-China trade tensions. 

With a rate cut a done deal, the policy outlook will be of particular importance. A repetition of the Fed's stance of 'acting as appropriate' to sustain the economic expansion is likely, which would be interpreted as the FOMC maintaining an easing bias, and leaving the door ajar for further policy loosening in the coming months. It is unlikely, though not inconceivable, that the FOMC alter their language to imply no further rate changes for the foreseeable future, though policymakers will likely be reluctant to sound unnecessarily hawkish. A couple of other topics will also be of interest, namely how the FOMC plan to address ongoing issues in funding markets, and President Trump's reaction to the decision - a tweet is almost certain before the night is out.

For the dollar, downside risks appear limited, with a rate cut fully priced in, and explicit hints at further easing unlikely. The greenback will, however, find some demand should the FOMC shed their easing bias. 

The Fed are, however, not the only central bank announcing their latest policy shift today, with rate decisions also due from Canada and Japan (overnight). The Bank of Canada (BoC) are set to keep rates unchanged at 1.75%, with markets not pricing in any policy easing until mid-2020. Nevertheless, policymakers will likely strike a more cautious tone, while possibly downwardly revising their economic forecasts, with the Canadian economy facing similar downside risks to all other developed nations.  

Meanwhile, overnight, the Bank of Japan (BoJ) are set to leave rates on hold, with policymakers' toolkits remaining practically empty. Economic forecasts may be downwardly revised, and rhetoric may gain a more dovish tilt, though the BoJ's ability to stimulate the Japanese economy remains questionable after decades of ultra-loose policies.

On the data front, a couple of notable US releases are due. Primarily, focus will fall on this afternoon's first estimate of third quarter GDP, expected to show the economy growing at just 1.7% on an annualised QoQ basis. While the first estimate of GDP is the least accurate, it tends to have the most significant market impact, with risks to today's figures being to the downside after a recent string of softer than expected activity reports. However, the impact on the dollar will likely be muted, with focus falling largely on tonight's FOMC decision. Finally, October's ADP employment change data is expected to show the US economy adding 120k jobs, evidencing the continued slowdown in hiring, though the correlation with Friday's official labour market data is somewhat dubious.

Today's Economic Calendar

Time Currency Release Consensus Previous
12.15pm USD ADP Employment Change (Oct) 120k 135k
12.30pm USD GDP (Annualised QoQ - Q3) 1.7% 2.0%
14.00pm CAD Bank of Canada Rate Decision 1.75% 1.75%
15.15pm CAD Bank of Canada Press Conference
18.00pm USD Federal Reserve Rate Decision 1.50% - 1.75% 1.75% - 2.00%
18.30pm USD Fed Chair Powell Press Conference
Early AM Thurs JPY Bank of Japan Rate Decision -0.10% -0.10%