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(Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.
With less than 80 days to go until Britain leaves the European Union, the path to Brexit winds to a critical crossroads on Tuesday when lawmakers vote on Prime Minister Theresa May’s withdrawal deal. The agreement, which May and EU leaders say cannot be renegotiated and is the only one available, will almost certainly be rejected. If so, uncertainty, paralysis and the likelihood of a disorderly ‘no deal’ Brexit will rise.
Volatility is nothing new to sterling, Friday being a microcosm of how the FX market is playing Brexit. A media report that Britain’s departure could be delayed sent the pound shooting up nearly a cent to its highest since Nov. 29, then minutes later May’s spokeswoman ruled out any delay and the pound fell right back again. One-month implied options volatility in sterling is much higher than euro vol, and that’s unlikely to change any time soon. All eyes on the big vote in Parliament on Tuesday and for sterling, moves below $1.25 or above $1.30 are both on the table.
The Fed reckons the world’s biggest economy is continuing to motor ahead but markets seem to think otherwise, their fears for the growth outlook knocking equity prices off record highs. More recently though they have cheered Fed Chairman Jerome Powell’s comment that the U.S. central bank can be patient in approving any further rate increases. Powell said that “especially with inflation low and under control”, the Fed can “be patient and watch patiently” to figure out which of the two competing narratives unfolds in 2019.
So whose view is correct? It’s true labour markets are robust and wage inflation has been on the rise — average earnings rose in December by 3.2 percent on an annual basis, matching October’s rise which was a 9-1/2-year high. But workers’ wage gains are also being eroded by inflation, with core CPI seen above the Fed’s 2 percent target in coming months. Powell’s newly dovish-sounding rhetoric has prompted money markets to price out Fed rate rises in 2019 but the producer price index due Jan 15 could be key. If it shows inflationary pressures cooling, there could be a further reprieve from markets’ rate-hike concerns.
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