MRP Shows Narrower Tory Lead; FOMC In Focus Today

The latest market highlights and our views on the key developments as sterling is knocked by YouGov MRP poll pointing to a narrower Tory majority, a trade deal is signed (but not that one), and the FOMC's latest policy decision is eyed today

Previous Day's Market Highlights

The majority of G10 FX remained rangebound for a second straight day on Tuesday, with a host of notable headlines and data releases failing to inspire significant volatility.

 

MRP Points to Narrower Tory Majority

Sterling pared its early gains on Tuesday as election jitters crept in after the latest YouGov MRP (multi-level regression and post-stratification) election model pointed to a narrower Tory majority than had been priced in.

The model, which correctly predicted the hung Parliament in 2017, forecasts a Conservative majority of 28 to result from Thursday's poll; down from the 68 seat victory that was predicted when the model was previously won. YouGov point to the Conservatives winning 339 seats, Labour 231, the Lib Dems 15, and the SNP 41.

However, due to the margin of error involved in the poll, a hung Parliament is still possible, a situation which would likely result in smaller, remain-favouring parties, forming some kind of alliance with Labour to attempt to force a 2nd referendum.

Digging deeper into the model, which, despite the Tory lead narrowing, projects the largest Tory majority since Thatcher in 1987, a number of 'big beasts' are at risk. Environment Secretary Theresa Villiers is set to lose her seat, as is veteran labour MP Dennis Skinner. Meanwhile, Foreign Secretary Dominic Raab and former Tory leader Iain Duncan Smith are both within a couple of percentage points of a defeat.

For both major parties, however, the poll may be a good result. For the Tories, a narrowing of the lead ensures they can still paint the race as close, which should aid them with getting the vote out, and remove some complacency. Labour, meanwhile, will be able to claim the race remains close, potentially helping them to win over last-minute swing voters.

Turning to the pound, after earlier taking a trip above the $1.32 handle for the first time since late-March, an quick 60 pips were lost after the poll's release, leaving sterling unchanged on the day.

A graphical representation of the poll is below.

 

A Trade Deal - But Not That One...

Markets finally got some certainty on a US trade deal on Tuesday, but, no, it's not the one you're thinking of.

Yesterday saw the announcement of a finalised version of the USMCA trade deal, a new agreement between the US, Canada and Mexico replacing the previous NAFTA agreement. However, with negotiations over the new trade deal having gone on almost since Trump was inaugurated as President, markets seem to have forgotten to care about the deal, and showed little, if any, noticeable reaction to the announcement.

Instead, focus remains on Sino-US trade developments, with risk sentiment receiving a relatively short-lived boost on Wall St Journal reports that trade negotiators on both sides are planning to delay Sunday's proposed tariff increases.

Once again, however, these reports came from anonymous 'people familiar with the matter' and weren't confirmed by US officials. White House Economic Adviser Larry Kudlow said he 'couldn't confirm' that the tariffs will be delayed; while White House Chief of Staff Mick Mulvaney stated that any tariff decisions 'depend on how talks go'.

These comments meant the boost in risk appetite was short-lived, seeing early gains in both the Aussie and Kiwi dollars fade, with both settling a touch lower on the day. A similar pattern was in evidence among safe-havens, with the dollar dipping 0.2%, while the Swiss franc and Japanese yen ended the day unchanged.

 

Impeachment

Sticking with the US, the potential impeachment of President Trump over dealings with Ukraine took another step forward yesterday, with House Democrats announcing 2 formal Articles of Impeachment against Trump. The Articles charge Trump with one count of abusing power, and one charge of obstructing Congress.

These Articles will now be sent to the House Judiciary Committee for a vote, before proceeding to a full House vote if successful. However, before anyone gets ahead of themselves, should impeachment proceedings reach a Senate trial (likely to be held in January) it is highly unlikely that the Republican-held Senate will return the two-thirds majority needed to remove Trump from office. The process, does, however, remain a tail risk for US assets.

 

The Data

Turning to Tuesday's data slate, a couple of noteworthy data points were released.

Firstly, from the UK, October's GDP data showed the economy stagnating on both a month-on-month and rolling 3-month basis. The stagnation can largely be put down to ongoing political uncertainties, with expansion in the services sector being offset by weakness in the manufacturing industry. The pound, however, didn't take any notice of the release, focusing instead on sentiment towards Thursday's election.

 

 

 

Meanwhile, across the Channel, economic sentiment appears to be improving in the eurozone, with the latest indicators from the ZEW institute hitting their highest levels in almost two years. In Germany, Europe's economic engine room, the sentiment index increased to 10.7, the highest since February of last year. For the eurozone as a whole, sentiment is at the highest since March last year, at 11.2. These readings, combined with a weaker dollar, helped the euro, which ended the day 0.3% higher.

 

 

 

Any Other Business

  • In a similar manner to FX, equities remained subdued on Tuesday. The pan-European Stoxx 600 shed 0.25%, while the US benchmark S&P 500 traded 0.1% lower 
  • Oil prices gained ground on Tuesday as OPEC's recent production cuts kept prices well-supported. Global benchmark Brent added 0.1%, while US WTI crude settled 0.35% higher
Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1845 1.1914 1.1620 2.47%
GBP/USD 1.3135 1.3215 1.2820 2.98%
EUR/USD 1.1085 1.1116 1.0981 1.21%
GBP/AUD 1.9270 1.9376 1.8863 2.65%
GBP/NZD 2.0125 2.0297 1.9837 2.27%
GBP/CAD 1.7380 1.7472 1.7023 2.57%

Today's Market Highlights

The final day of the election campaign is upon us, however markets will also be focused on the final Fed decision of the decade, and the latest US inflation figures.

 

FOMC - Firmly on Hold

Turning first to the FOMC, and the final monetary policy decision of the year, and the decade. Policymakers are set to leave interest rates on hold this time around, maintaining the target range for the Fed Funds Rate at 1.50% - 1.75%.

In short, the Fed have clearly indicated that policy will be on hold barring a 'material reassessment' of the economic outlook. There has been no such reassessment since the October FOMC, hence there will be no change to rates this time around.

As a result, both the rate statement and Chair Powell's press conference are likely to strike a similar tone to the previous meeting, indicating that the economy is in a good place, and that the current policy stance is appropriate, with the Fed set to assess the impact of this year's 75bps worth of 'insurance' cuts before adjusting policy again.

In fact, the most interesting part of the announcement will likely be the FOMC's latest economic projections, though these are also likely to be little changed from the latest read back in September. Barring a modest downward revision to unemployment expectations, forecasts for inflation and economic growth will likely remain unchanged. The dot plot, however, will be eyed for a read on policy expectations. This year's dots will be revised lower, to take into account recent rate cuts, while 2020's dots should show rates remaining unchanged throughout the course of the next 12 months.

 

US Inflation - Heating Up

Perhaps of more interest than the Fed's policy decision will be the latest US CPI figures, which are today's only notable data release.

The release is expected to show headline inflation beginning to heat up, with CPI set to have increased at 2.0% YoY last month, which would be the fastest pace since April, and in line with the Fed's inflation aim. Core CPI, which strips out the impact of volatile food and energy prices, is set to remain unchanged at 2.3% YoY. The uptick in inflation, however, is unlikely to materially alter the FOMC's monetary policy path, though will be a welcome sign for policymakers.

 

 

 

General Election - The Home Straight

Back in the UK, the direction of the pound will be contingent on any last-minute shifts in sentiment towards tomorrow's election - either stemming from opinion polling or any campaign developments.

With today being the final day of campaigning before polling day, all parties will be taking advantage of their last chance to ram home their campaign messages. As such, expect to hear a lot of 'get Brexit done' from the Tories; and 'it's time for real change' from Labour.

From midnight, there will be a media blackout on election coverage until polls close at 10pm tomorrow. At this point, the exit poll will be released, giving a clearer picture of the election result, which will trickle in during the early hours.

Today's Economic Calendar

Time Currency Release Consensus Previous
13.30pm USD CPI (YoY - Nov) 2.0% 1.8%
13.30pm USD Core CPI (YoY - Nov) 2.3% 2.3%
19.00pm USD FOMC Rate Decision, Statement & Summary of Economic Projections 1.50% - 1.75% 1.50% - 1.75%
19.30pm USD Fed Chair Powell Press Conference