Global Themes

The U.S. dollar eased off one-month highs against a broad basket of currencies but remained supported by a messy global backdrop. Sterling rebounded from fresh 20-month lows to lead most European currencies higher. The yen was flat while higher oil prices above $52 underpinned the Canadian dollar. Britain’s pound crashed to April 2017 at the start of Europe’s day after word broke that Theresa May’s Conservative party would pursue a no confidence vote in her leadership for the bungled handling of Brexit. Britain is expected to hold the confidence vote on the prime minister today with the results due around 4 p.m. ET. Sterling rallied, a sign of confidence in Mrs. May surviving the vote which if realized would strengthened her weakened hand. If she loses the vote, heightened uncertainty in all thing U.K. would ensue, potentially to the detriment of the pound.


The euro kept to a narrow range against the greenback with traders wary of staking big bets on the eve of the ECB’s final policy meeting of the year. No change to its main interest rate, currently at zero, is expected but the central bank has telegrapghed it would likely retire its QE stimulus at the end of the year. Key for the euro’s coming prospects hinge on the tone of President Mario Draghi’s assessment of the bloc’s economy and whether its new forecasts sketch a weaker outlook for growth, dovish scenarios that would tend to limit gains for the single currency.


The dollar showed little reaction to news of an uptick in underlying inflation at the consumer level. Core consumer prices rose by a notch to an annual rate of 2.2% in November. The data fit with the view of inflation holding near the Fed’s number (2%), keeping higher rates in the conversation for next year. The Fed’s final meeting of the year comes a week from today (Dec. 19). A market gauge prices an 80% liklihood of the Fed raising rates by 25 basis points to a range of 2.25% to 2.50%. Key for the buck will be the Fed’s forecasts for interest rates next year.


Reduced global trade tensions coupled with higher, for now, global markets treated Canada’s risk-correlated dollar to a positive start to the midweek session. Oil prices were on the north end of $52 with sentiment buoyed by signs of a softening in the U.S.-China trade dispute. Upside for the loonie was checked by data showing Canadian companies ran at a lower rate of capacity (82.6% vs the previous 84.1%) during the third quarter, data that depicted a high bar for the Bank of Canada to raise borrowing rates as soon its first meeting of 2019 on Jan. 9. 


It was new 20-month lows overnight for sterling against the dollar after news broke that Theresa May’s Conservative party called a vote of no confidence in her leadership. The Tories will vote today whether to keep Mrs. May or tap someone else, a process that could take weeks and increase already intense political uncertainty, a scenario that could provide fuel for another sterling selloff. If Mrs. May wins the measure, she would be safe from another confidence vote for a year, a situation that would shore up her weakened stance, an outcome that could stoke a relief rally for the pound.

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