Yesterday saw Markit Services PMI record a reading of 49.0 against a consensus of 49.5 and Markit Manufacturing PMI recorded a reading of 47.4 against a consensus of 49.3. Both data releases were below expectation and sterling was quick to lose value. Growth in manufacturing slowed more dramatically than at any other point in the last 7 years and the combined data meant the UK economy was on track for its worst performance since the global financial crisis 10 years ago.

However, markets are still full of optimism as the UK Government confirmed it will bring its Brexit Withdrawal Bill to the House of Commons this Friday. Earlier concessions made to the opposition party and Tory moderates last time round have been removed, and now with an 80-seat majority, the Tories are expected to comfortably pass this bill. After 3 ½ years, it seems the UK will finally depart the EU on the 31st January 2020.

Boris’ huge victory is seen by markets as the best possible outcome, with a business-friendly manifesto and clarity on the year ahead. The Queens Speech will be read later this week and may roll over into Friday as it’s debated amongst MPs, although this will be more of a formality. The Queens Speech sets out the Government’s programme of legislation. Traders will also be looking towards the first comments from the UK’s Bank of England since the General Election, this Thursday. Interest rates are expected to remain unchanged at .75% and Bloomberg has noted that the possibility of an interest rate cut by August 2020 has reduced from 50% to 40%.

Recent news for Europe shows mixed results.

Eurozone Pmi Manufacturing Contracts for an 11th Consecutive Month

Uncertainty over Brexit has been partially blamed for the eurozone’s worst economic performance for 6 years. The latest decline was the second biggest over the past 10 years and increases the chances of a Q4 contraction. PMI Services rose marginally to 52.4 but PMI Manufacturing crashed to 45.9. That means manufacturing activity has now contracted 11 months in a row.

German manufacturing PMI was particularly poor, falling from 44.1 in November to 43.4 in December, the first downward reading in 3 months and below market expectations of 44.5.

To add to German woes, business activity fell for the 4th month in concession. Perhaps, unexpectedly, it is the French economy that is helping to keep the Eurozone afloat despite a series of national protests and strikes.

“Manufacturing in the euro area is stuck in recession, but resilient services are just about keeping the economy’s head above water” said Chief Eurozone Economist Claus Vistesen at Pantheon Macroeconomics.

US Growth and Trade Outlook ‘More’ Positive

Following a series of interest rate cuts, the US economy now appears to be on a pace of steady growth. Back in August, many economists forecast a 50% chance of a downturn but the Federal Reserve’s monetary policy management, coupled with a more positive trade outlook seemed to have reduced the recession threat. A trade deal with Mexico and Canada will keep most goods traded between the 3 nations at tariff free, and an agreement with China to avoid the most extreme tariffs also looks to be agreed.

However, it’ll likely be Brexit factors that drive the GBPUSD exchange rate as senior strategist Mansoor Mohi-uddin said, “sterling is set to rally in to a higher $1.35-$1.45 range near term against the greenback as an orderly exit from the European Union in January and the increased chances of smoother trade negotiations during 2020 lift confidence in the UK economy.”

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