Sterling pulls back as general election vote looms in UK
There was not a lot of excitement in G10 currencies last week, outside of sterling.
T
he pound gave up some of its recent gains as the prospects for a general election cloud the prospects for a near-term parliamentary agreement on a withdrawal agreement.

Steady PMI indices of business activity in the Eurozone were overshadowed by a downbeat assessment from Draghi at his last ECB meeting, and European currencies joined sterling in the pullback against the US dollar. Emerging market currencies generally put in another positive performance, led by the Brazilian real that rose on news that pension reform was approved by the senate there.

Key for this week will be a slate of major central bank decisions. The most important is, of course, the Federal Reserve, which is expected to cut rates by a quarter-point on Wednesday. The Bank of Japan and Bank of Canada decisions will round up the week, capped by the US payroll report for October on Friday afternoon.

GBP



The risk of the UK crashing out of the European Union without a deal has been averted, for the time being at least, after EU leaders granted another three-month extension to the Brexit deadline until 31st January 2020. The so-called ‘flextension’ does allow the UK to leave the bloc in the interim, although we still think that a general election will be needed. Boris Johnson called for an election on 12th December last week. This does, however, look unlikely to receive the two-thirds approval it needs from Parliament, given Labour's opposition, and an alternative route to an early vote may be required.

Parliamentary gridlock and the absence of first-tier macroeconomic data could cause sterling to take a break from the previous weeks wild gyrations.

EUR



The all-important PMIs of business activity bounced back slightly in October, confirming that Eurozone growth has stabilised just above the stalling level for now. However, Draghi's downbeat assessment of the Eurozone economy at his last ECB meeting weighed down the euro.

We will get another raft of important macroeconomic data this week, including September unemployment and third-quarter GDP growth. Expectations have been beaten so low that even modest numbers may result in a euro rally. These are, however, backwards-looking data, so we expect the common currency to react mostly to the Federal Reserve meeting on Wednesday.

USD



Last week was short in market-moving economic releases, so financial markets mostly celebrated the perceived likelihood of a US-China trade deal by sending equity markets to fresh highs. The dollar’s performance in this risk-seeking environment was mixed, rising against most G10 currencies but retreating against the majority of emerging market ones.

All eyes now turn to the Federal Reserve meeting on Wednesday. We expect them to cut rates in line with market consensus, but communications should be on the hawkish side, as on balance risks to the outlook seem to have receded since the last meeting. This could open the way for a dollar rally in the short-term.
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