May Wins Leadership Contest; ECB, SNB and Norges Bank Meetings

The pound surged yesterday on headlines that UK PM Theresa May was likely to win a leadership challenge, which she did. When the official result was announced, the currency pulled back as market attention turned back to Brexit. As for today, euro traders are likely to lock their gaze on the ECB policy decision. The Norges Bank and the SNB decide on monetary policy as well.

Theresa May Survives Confidence Vote

After tumbling for two consecutive days, the pound rebounded yesterday to end the day as the main gainer against the other G10 currencies. It gained the most against NZD, CHF and NOK, while the currency that depreciated the least against sterling was EUR.

For the third day in a row, the epicenter, at least within the FX sphere, was UK politics. Yesterday, during the early European morning, it was officially announced that the 48 letters needed for triggering a leadership contest against PM Theresa May were submitted. The pound slid only somewhat at the time as the reports ahead of the official announcement have already done their damage. Subsequently, the currency rebounded as several Tories publicly pledged their support for May, and continued to surge as more of them were doing so, with reports suggesting that the majority she needed was matched.

The vote took place last night and indeed, PM May survived the challenge, with the pound tumbling around 80 pips against its US counterpart, after it gained near 200 throughout the day, ahead of the vote results. In our view, this is a classic “buy the rumor, sell the fact” market reaction, with market attention shifting back to Brexit.

We are now back to square one, we believe. Theresa May is the UK’s PM (and cannot be challenged by her party for the next 12 months), she plans to meet with EU officials in order to discuss Brexit, but EU officials remain unwilling to renegotiate. Given the hostility she faces within the Parliament and also taking into account that more than one third of her party MPs voted against her, we still see the approval of the Brexit deal as unlikely. In our view, uncertainty over the UK’s future remains elevated and thus, we would expect any further pound gains to remain limited and short lived, at least until the fog clears out.

GBP/CHF — Technical Outlook

The British pound had a great rally yesterday, against all of its major counterparts. GBP/CHF pushed strongly to the upside, away from its key support level at 1.2400. The pair managed to gain about 180 pips, but the bears stepped in and pulled GBP/CHF back down a bit. Overall, the pair still remains vulnerable due to the ongoing Brexit drama. But from the short-term perspective, we might see GBP/CHF getting pushed slightly higher by those who have missed yesterday’s rally. Also, our momentum indicators suggest that there could still be a bit of steam left in this pair. That said, we still don’t expect any further gains to lead into a sustained recovery.

If the GBP/CHF moves upwards and breaks the 1.2580 barrier, this might invite a bit more buyers and the rate could get lifted to its next potential area of resistance at 1.2645, marked by the low of the 4thof December. If that area is not able to withhold the rate from rising, the pair could move higher. The only thing for traders to watch out for is the short-term downside resistance line, drawn from the high of the 26thof November, which could limit the upside.

On the other hand, if yesterday’s bullish activity was enough for this week, GBP/CHF might reverse back down and continue moving south, especially if the rate drops below the 1.2505 zone, marked by yesterday’s intraday swing low. Slightly below that lies another potential support obstacle at 1.2485, which was the inside swing high of the 11thof December. If that obstacle is just seen as temporary pit-stop for the bears, the pair could continue moving lower towards the next strong support area at 1.2400, marked by yesterday’s low.

ECB Decision Takes Center Stage, Norges Bank and SNB Meet as Well

The euro strengthened as well yesterday, gaining against all the other G10 currencies, except the British pound. Although the same headlines that fueled the pound may have helped the euro as well, the common currency was also boosted by news that Italy is set to propose a budget deficit target of 2%, which is much lower than the previous 2.4%, a move that increases the chances for the European Commission to approve the government’s new proposal.

As for today, euro traders are likely to be sitting on the edge of their seats in anticipation of the ECB policy decision. When they last met, ECB policymakers decided to keep policy unchanged, while the accompanying statement contained no surprises. The Bank reiterated its view that asset purchases are likely to end in December but did not confirm it. It kept the decision subject to incoming data confirming the medium-term inflation outlook.

At the press conference following the decision, President Draghi downplayed the softness in data releases saying that the risks surrounding the Euro-area economic outlook remain broadly balanced. Since then, data continued to come on the soft side. GDP growth slowed to +0.2% qoq in Q3 from +0.4% in Q2, while the composite PMI for November hit its lowest level since September 2016. With regards to inflation, according to preliminary data, both the headline and core rates slid to +2.0% yoy and +1.0% yoy in November from +2.2% and +1.1% respectively. Therefore, we expect market attention to fall on whether the Bank will confirm the end of asset purchases this month and whether President Draghi will continue seeing balanced risks with regards to the bloc’s economic and inflation outlooks.

When he testified before the European Parliament’s Economic and Monetary Affairs Committee on the 26th of November, the ECB Chief acknowledged the recent loss in growth momentum but noted that some of the slowdown may be temporary. He also repeated that he still anticipates bond purchases to end in December. Since then, his remarks were echoed by several ECB members, something suggesting that the Bank is unlikely to alter its plans for ending QE, and that policymakers may maintain the view that the risks surrounding the bloc’s economic outlook remain broadly balanced. Given the further weakness in the data, they may just revise slightly lower their growth and inflation projections, but we don’t expect any material shift in policy.

As for the euro, although it could slide somewhat if the ECB’s forecasts are trimmed, an upbeat language by President Draghi at the press conference may keep those loses short-lived and the euro could rebound again. On the other hand, a dovish switch pointing to downside risks in Euro area’s economic outlook could confirm concerns derived from the data, and the euro may tumble.

Apart from the ECB, we have two more G10 central banks holding their last monetary policy gatherings for the year: the Norges Bank and the SNB.

Kicking off with the Norges Bank, at its latest meeting, the Bank kept interest rates unchanged at +0.75% — after raising them from +0.50% in September — and repeated that the key policy rate would most likely increase further in Q1 2019. Latest data from Norway showed that mainland GDP for Q3 slowed to +0.3% qoq from +0.7% in Q2, below the Bank’s estimate, which was +0.7%. That said, November’s inflation figures came in better than anticipated. The headline CPI rate rebounded to +3.5% yoy from +3.1%, while the core rate surged to +2.2% yoy from +1.6%.

With both rates above the Bank’s objective of 2.0%, as well as above its own projections for the month, we doubt that policymakers would be tempted to push back the timing of when they expect interest rates to rise again, despite the slowdown in GDP. They may prefer to see further weakness in data before they consider pushing that timing back.

Moving on with the SNB, when they last gathered, Swiss policymakers kept their benchmark rate unchanged at -0.75%, reiterating that they will remain active in the FX market as necessary and repeating that the Swiss franc is highly valued. They also revised down their inflation forecasts, suggesting that the CPI rate is likely to hit the Bank’s 2% target in Q2 2021. The decision was taken at a time when the rate was at +1.2% yoy and this was conditional upon interest rates staying at current levels for the whole forecast horizon. Last Tuesday, data showed that Switzerland’s inflation slowed to +0.9% yoy in November from 1.1% yoy, which is in line with the Bank’s projections for Q4. Thus, we see it unlikely for SNB officials to change their stance around policy at this gathering.

EUR/NOK — Technical Outlook

EUR/NOK continues to slowly move higher, trading above its medium-term upside support line taken from the low of the 17thof October. What’s more, in the shorter run, the pair is printing higher peaks and higher troughs since the 5thof December and thus, we will aim for higher levels. But if the rate slides and confirms a near-term lower low, we will shift our view to a more cautious one and then we would aim for the medium-term upside support line, which still could show good support for the rate.

EUR/NOK currently sits above a key support level at 9.729, which, just on Monday, acted as good resistance. If the pair moves a bit lower, but fails to fall below it, this could be a good sign for the bulls to jump in and drive EUR/NOK higher, towards the recently-found resistance at 9.7535. A break above that level may lift the rate to its next potential target at 9.7670. This obstacle was the highest point of November. This is where the rate might stall for a bit until the bulls and the bears decide who takes the driver’s seat from there.

Alternatively, a drop below the 9.7011 hurdle, marked by yesterday’s low, could be seen as a temporary sign of weakness. This might drive the pair further down to test the 9.6890 zone, a break of which could push EUR/NOK towards its next potential support zone at around 9.6550 level. This is where the rate was held from moving lower on the 7thof December.

As for the Rest of Today’s Events

The final EU summit for the year begins today, with market participants perhaps focusing on what UK PM Theresa May could gain from the gathering. However, as we already noted, EU officials have repeatedly said that the existing deal is not negotiable, which make us believe that May will return back home empty handed.

With regards to the economic data, Germany’s final inflation prints for November are already out, but as it is usually the case, they confirmed their preliminary estimates. In the US, we have the initial jobless claims for the week ended on the 7thof December. Expectations are for a decline to 226k from 231k the week before.

As for tonight, during the Asian morning Friday, we get China’s fixed asset investment, industrial production and retail sales, all for November. Both fixed asset investment and retail sales are expected to have accelerated to +5.8% yoy and +9.0% yoy from +5.7% and +8.6% respectively, while the industrial production yearly rate is anticipated to have held steady at +5.9%. In Japan, we have the Tankan survey for Q4. Both the large manufacturers and large non-manufacturers indices are expected to have declined to 17 and 21 from 19 and 22 respectively.


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