After the last-minute deal to secure a deal on revised UK terms for EU membership, the positive Sterling impact is likely to be very short lived. Crucially, London Mayor Boris Johnson has announced that he will campaign for an EU exit in the referendum which will is due to be held on June 23rd. As well as providing an important boost to the no campaign and boost the possibility of Brexit, it will also undermine the Prime Minister Cameron and Chancellor Osborne axis. There will be increased tensions within the ruling Conservative Party and an even greater risk of extremely damaging splits which would also damage investor confidence in economic policy. Markets are liable to treat the possibility of Brexit more seriously, especially if opinion polls consistently point to a no vote, which will leave Sterling vulnerable to significant selling as overseas funds pull out.
Preparations for the G20 meeting on Thursday and Friday will be an important focus during the week, especially with China holding the presidency of G20 this year. The Chinese government will be desperate from a PR point of view to secure positive headlines and commitment surrounding the global economy. In this context, there is likely to be a strong commitment to keeping the yuan stable ahead of the meeting and will also look to make positive announcements. This combination should help underpin global risk conditions during the week.
US consumer confidence data will be reported on Tuesday with the durables goods orders and jobless claims data on Thursday followed by preliminary GDP data on Friday. The GDP data will probably trigger the biggest short-term reaction, although the durables data may be important for overall market sentiment as the global capital spending outlook remains under close scrutiny. The core PCE inflation data will also be important on Friday after the stronger than expected CPI data on Friday.
London Mayor Boris Johnson
The only major UK economic release due over the week is the second estimate of fourth-quarter GDP on Thursday, although the overall impact should be limited. There are, however, important Bank of England events during the week with Governor Carney and three other MPC members due to testify on the inflation report to the Treasury Select Committee on Tuesday. Although a dovish tone should be priced in, there will be a close focus on any debate surrounding a possible interest rate cut or even a move to negative rates. Debate surrounding the EU referendum within the testimony will also be important for Sterling sentiment.
Euro-zone flash PMI releases will be important on Monday with any evidence of a further downturn in the area likely to trigger a further net deterioration in confidence and put additional pressure on the ECB to relax monetary policy further in December. The latest German IFO data is due on Tuesday. Latest money supply and lending data will also be released on Thursday and will be monitored very closely within the ECB given that lending and the monetary transmission trends are a key focus. More important will be any hints from ECB officials surrounding the likely decision in March. Comments from chief economist Praet will be watched closely on Friday, although the most important speech is likely to be from Lautenschlaeger on Monday. It was strong opposition from her to further monetary easing ahead of December’s meeting which derailed Draghi’s attempts to force more aggressive easing.