The pound has drifted lower since the beginning of the New Year with falls seen against both the euro and US dollar. Friday saw weak Purchasing Managers Index data for the construction sector which fell to 44.4, the sharpest drop since 2009 and putting pressure on the pound. The data followed Thursday’s PMI numbers for the manufacturing sector which fell at the fastest rate for seven years.

The focus throughout 2020 however will almost certainly centre on the thorny issue of future trade between Britain and the EU. Paul Dales at Capital Economics said, “Whatever the Brexit drama delivers in 2020, it seems that uncertainty will continue to hold back GDP growth and keep a lid on the pound, interest rates and gilt yields.”

Although Boris Johnson has signalled, he wants to avoid the 'B' word for much of 2020 and has even renamed the negotiation team “Taskforce Europe”, the EU have suggested he may still extend the transition period. The EU’s new trade commissioner Phil Hogan highlighted that Boris Johnson had failed to take the UK out of the EU on October 31st having broken his promise and said “I don’t believe prime minister Boris Johnson will die in a ditch over the time-line for the future relationship either.”

Yael Selfin, chief economist at KPMG UK said “Overall we think the fact that the transition period is likely to be only a year is going to leave quite a lot of uncertainty for businesses. The possibility of a cliff edge at the end of the year is quite high, which is not great news. It is not something we are likely to see resolved early – it is likely to drag until much later.”

The markets were given a wakeup call with the pound falling after the withdrawal was amended post-election to prevent the implementation period being extended. That bill is expected to become law by Thursday 9th January.

Eurozone Economic Data Out This Week

Eurozone Economic Data Out This Week

EU PMI data for the services sector is released this morning and may offer some clues as to the strength of the sector. EU retail sales numbers are released tomorrow morning whilst unemployment data for November is released on Thursday. Last week’s PMI manufacturing data saw weakness in the sector reinforcing concerns over the EU economy. The German economy in particular is struggling with a car industry that is battling weak demand from China, the prospect of the US imposing tariffs on German cars and a late entry into the electric vehicle market. Any further slide in the German economy could prove negative for the euro.

US Iran Tensions Causing Volatility for US Dollar Rates

The US dollar looks set for a volatile period following the US drone strike in Baghdad which killed Iranian General Qassem Suleimani. With Iran declaring ‘severe revenge’ any further escalations will likely result in volatility for the US dollar. The safe haven currencies including the US dollar jumped higher straight after the attack hitting a one week high against the euro. The price of oil has also rallied higher with Brent crude rising by more than 4% on Friday with further gains seen last night. Donald Trump tweeted on Saturday that the “US has targeted 52 Iranian sites… some at a high level and important to Iran and Iranian culture, and those targets, and Iran itself, WILL BE HIT VERY FAST AND VERY HARD.”

US PMI data for the services sector is released this afternoon ahead of Friday’s US non-farm payrolls. 2020 will be important in terms of a potential trade deal between the US and China especially considering total US debt broke $23 trillion in November. Let’s not forget it is also the year of the US election.
After three interest rate cuts in the US last year the Fed has less tools available to reignite the economy when there is a real risk of recession. Any significant escalation in the Middle East could see the door open to further interest rate cuts.

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