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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 15 December 2019
Last week concluded on a positive note for the markets with global trade, monetary policy and Brexit all in focus. An agreement in principal between the world’s two largest economies, the U.S. and China to avoid an increase in tariff duties this month and commence an incremental unwinding of existing tariffs was welcomed by the market. This warm reception was evidenced by a boost in risk appetite as illustrated by a rise in equities and yields, with the USD losing ground and the CNY strengthening. Whether the ‘deal’ can pass the test of time remains to be seen, however, with China’s commitment to purchase unspecified amounts of US agricultural products seen as questionable and perhaps unsustainable.
As expected, the Federal Reserve left interest rates unchanged in the 1.50-1.75% range in a unanimous 10-0 vote. Policy makers cited that the “current stance of policy is appropriate” and even removed the perceived 2020 hike from their latest DOT plot, which now shows that interest rates are likely to remain unchanged in 2020. This was in conjunction with a more upbeat tone from policy makers which noted the continued firmness of the labour market and modest increases in economic activity. However, the absence of inflationary pressures means that even if there is not a reduction in interest rates in 2020, rates are likely to remain low for an extended period of time.
In the UK, the general election concluded with a solid victory for Boris Johnson’s Conservative Party. The Conservative Party were able to secure 365 seats, compared to the Labour Party’s 202, SNP’s 48 and Liberal Democrats 11. With Boris Johnson now likely to win the support for his Brexit deal and prevent further delays to the United Kingdom’s departure from the European Union, the pound has rallied on reduced fears over a no-deal Brexit. In the aftermath of the election results, GBPUSD was able to climb above 1.35, a new 2019 high, before ceding some ground to finish above the 1.33 level. Our forecast is for GBPUSD to continue to appreciate in 2020, reaching up to 1.40 by Q3.
The week ahead sees a lot of economic releases from the US ahead of the holidays, including housing starts, existing home sales, industrial production, personal income and revised Q3 GDP. The Bank of England’s MPC will also meet, although no change in monetary policy is expected.
Source: Emirates NBD Research, Bloomberg
FX Week - 12th January 2020
Risk appetite boosted
US-China trade talks ease
The week ends on an optimistic tone