14/12/2018 - Market Awaits EU Council Summit

GBP

The British Pound returned to recent highs on Thursday, but analysts expect the currency's gains to ultimately be limited to tight ranges for the duration of the two-day European Council summit which gets underway today. Theresa May has gone back to Brussels on Thursday to seek legal assurances concerning the controversial backstop clause held in the withdrawal agreement. May wants a legal guarantee to ensure they are not locked into the EU single market and customs union indefinitely in the event once they exit the EU.

Reports are suggesting that the EU won’t be able to offer the UK enough to get the British parliament to back the deal as negotiations took place over a month and everything had been agreed. EU leaders have so far only offered reassurances to May over the Irish backstop, the most controversial part of the divorce deal. She’s seeking changes to make it more palatable to the majority of lawmakers who so far oppose it. It is unclear at this point at what the reassurances could be and the treaty text will not be changed.

EUR

The Euro has fallen in response to the latest statements made by the European Central Bank who say risks to the Eurozone economy are "moving to the downside" while issuing a set of downgraded growth and inflation forecasts for 2019. Mario Draghi said this was because of a range of concerns over geopolitics, trade protectionism and the market volatility. Due to Draghi making these comments this pushed the Euro lower and was reflected in updated economic projections that lowered the immediate outlook for inflation and growth.

The ECB will reinvest for an extended period of time past the date when interest rate increases start. It will also give itself more leeway to make purchases, a year rather than three months previously, to “allow for a regular and balanced market presence.” Policy makers expect to keep borrowing costs at record lows at least through the summer of next year.

Draghi described the ECB’s view about the outlook for the 19-nation economy as representing “continued confidence with increasing caution.” The underlying strength of domestic demand continued to drive the expansion as labor markets tighten and wages grow faster. On the other hand, diminishing contribution from external demand “may suggest some slower growth momentum ahead,” he said. Lastly the government council did not discuss when interest rates will rise nor how long it will continue to reinvestments as policy makers are ‘reflecting’ on possibilities for a new round of longer-term loans to banks, Draghi said.

Key Announcements

1:30 – USD – Retail Sales expected to decrease to 0.1%