The Pound declined against the Dollar while making gains against the Euro yesterday. Last week, PM David Cameron split from his mainland neighbors, opting out of a new EU treaty that will build greater fiscal ties within the Union, citing Britain’s best interests and sovereignty for the snub. The abstention has encouraged investors to extend the shift of capital out of the Eurozone and into the relative safety of British government assets, driving the yield on 10-Yr Gilts to a new all-time low. In the week ahead, investors will take note of key CPI and RPI data, both expected to show a modest decline.
The Dollar made gains against the Dollar and the Pound yesterday as risk appitite decreases. Today we have the last FOMC meeting of the year will be held. No major surprises, policy-wise, are expected, but there could be changes in the communications strategy. In particular, Fed vice chairman Yellen, who is also heading the task force on FOMC communication, and Chicago Fed president Evans, will be speaking in favor of changing the strategy, might clarify how Fed policies will be affected by changes on economic activity. However, it remains unclear whether the task force is far along with its work to present a new strategy as early as next week. Also today, the retail sales report for November is expected to remain on track, expected increase 0.5%, with the main driver being car sales. Core sales are expected to look weaker than last month, as chain store sales figures have been losing steam over the past few months.
On Friday, core CPI is expected to remain modest, but slightly over consensus, increasing 0.2% m/m due to the rent-of-shelter component, which has remained surprisingly strong over the past couple of months. The first figures for manufacturing confidence in December will be released in the form of local business surveys from New York and Philadelphia Fed. Following last week’s surprisingly strong ISM figures, moderate increases in both surveys are to be expected, with the Empire figure rising to 4.6 and the Philly figure increasing to 7.0.
The Euro declined against the Euro and the Pound after last week’s European summit failed to restore market confidence. The single currency fell to lows at $1.3178 as European equities declined. Italy and Spain’s borrowing costs also spiked prompting the ECB to intervene to prop up Italian debt through bond purchases. European leaders with the notable exception of the UK agreed to a new fiscal compact with greater fiscal integration including enforcement of debt and deficit rules and powers to reject national budgets.
Britain, fearing the impact on its financial sector and loss of autonomy over its economy, declined to take part in the agreement. Market response has been skeptical given the lack of a concrete action plan and prospects for further summits to develop the plan. After S&P warned last week that it may downgrade the debt of 15 European nations, Moody’s has now announced the same, placing further pressure on the euro. Given the mounting challenges, the euro is likely to remain pressured in the near term.
Data released 13th December 2011
UK 09.30 CPI (November)
RPI
UK 09.30 DCLG House Price Index (October)
US 13.30 Retail Sales / Ex Autos (November)
US 15.00 Business Inventories (October)
US 19.15 FOMC Interest Rate Announcement