The R Word?

A sharp drop in industrial production heightens the risk of a technical recession in Germany ahead of today’s BoC meeting and Fed minutes.

Previous Day's Market Highlights

While typically of little significance, German industrial production figures for November gave markets the most food for thought yesterday. The release showed the sharpest drop in production since summer 2015 while the previous month’s figures were also revised downward. This has heightened the risk of the German economy having entered a technical recession in the second half of 2018 and, with Germany being the eurozone’s largest economy, raised fears the over growth of the whole single currency bloc. Despite the negative news, the euro traded only 0.2% weaker. 

Sterling traded broadly weaker on Tuesday ahead of today’s first day of debate on the Brexit Withdrawal Agreement. The pound’s fall was largely in anticipation of Brexit-related developments over the coming days, as well as due to ongoing fears over the risk of leaving the European Union without a deal. While there was little news of note, the date for the meaningful vote on the legislation has now been confirmed for 15th January hence markets are likely to tread carefully in anticipation of next week’s outcome.
 
Major economic data was lacking, with only Canadian trade balance figures and US job openings of note, both of which were released in line with market expectations. 
 
Away from FX, European equity markets gained over 1%, shrugging off poor German data, on the possibility of progress in the US-China trade talks. US markets continued in a similar vein, with the S&P 500 hitting a 3 week high. Finally, late on Tuesday evening, President Trump used his address to the nation to continue to demand funds for his border wall. With the Democrats unlikely to offer such funding, the prospect of this becoming the longest government shutdown on record, a milestone set to be reached on Friday, has markedly increased.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1108 1.1180 1.1025 1.39%
GBP/USD 1.2740 1.2800 1.2440 2.81%
EUR/USD 1.1470 1.1496 1.1269 1.88%
GBP/AUD 1.7800 1.8190 1.7291 4.94%
GBP/NZD 1.8853 1.9025 1.8117 4.77%
GBP/CAD 1.6860 1.7392 1.6700 3.98%

Today's Market Highlights

Today looks likely to be a more volatile day, with two key releases on the calendar. Firstly, the Bank of Canada meeting concludes with the BoC’s latest rate decision being announced this afternoon. Having previously indicated that a rate hike was on the cards, the recent lacklustre economic data combined with continued weak domestic oil prices, has dampened expectations for any change to monetary policy. Expectations are also for the BoC to continue to tread carefully with further rate hikes while the full impacts of sluggish inflation and global trade tensions on the Canadian economy can be assessed.
 
Later in the evening, the Federal Reserve release minutes from their December meeting. Despite hiking rates at this meeting, recent messages from the Fed (including Powell’s speech on Friday) have shown that the FOMC are becoming increasingly data dependant and are open to slowing or even pausing the pace of tightening monetary policy. Market participants will be closely watching the minutes as they grapple with gauging the path of monetary policy throughout the coming year, with current pricing showing an 11.5% chance of a rate cut by year-end.
 
Other economic data is of lower significance and unlikely to cause major volatility but includes eurozone unemployment figures for November in addition to Canadian housing starts. The calendar of central bank speakers is also busier today, with Fed voters Evans and Rosengren scheduled to speak.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Unemployment Rate 8.1% 8.1%
3:00pm CAD Bank of Canada Rate Decision 1.75% 1.75%
7:00pm USD FOMC Meeting Minutes