The week ahead: ECB, FED and UK elections take market's focus

US Nonfarm Payrolls have kicked markets into gear ahead of series of critical events for the week ahead. On Friday, the November jobs data from the United States came to the US dollar's rescue against an otherwise contemptible backdrop for the currency. The Nonfarm Payrolls impressed with a headline of 266K which was well above the 183K estimated – a stark reminder that and well  ADP report is simply not a dependable prelude. The headline was also complemented by upward revisions to prior months which added a further 41K to payrolls. The secondary details were not bad either with the average hourly earnings for the year climbing by 3.1% while the unemployment rate fell to 3.5% and below the estimated 3.6%. 

All told, the employment data supports the Fed’s stance of taking a pause in its easing cycle, especially following the PMI comeback in China - However, the jury is certainly still out on whether that any of these numbers signify a sustainable rebound as we head over to 2020. Indeed, both ISM indices in the US are not looking so pretty (ISM manufacturing index has been in contraction for four consecutive months) and uncertainty will likely fester into the closing weeks of the year. 

Weekend notes

• China's trade surplus narrowed to $38.73 billion in November amid sharp drop in exports

• GBP/USD: Pound stable at highs alongside Conservatives’ lead

• Hong Kong saw its biggest pro-democracy protest in months on Sunday, signaling more unrest to come in 2020 as the movement that began in June to fight China’s increasing grip on the city shows its staying power - Bloomberg.

A data-dependent US Federal Reserve to hold 

As we move forward, looking ahead for the week, expectations are that US Federal Reserve will keep policy and rates steady at 1.50-1.75% which will officially bring the mid-cycle adjustment that started in July to an end while a "material reassessment" in the outlook is a precondition for the central bank.  However,  a sub-consensus growth of 1.4% in the US is enough to expect the Fed to cut rates again in the first half of 2020 which likely will be a thorn in the side for the US dollar bulls. Chair Powell should re-emphasise the data-dependent approach of the committee. 

UK data to be pushed aside with a focus on the UK elections

Other key data events for the US will be Headline CPI and Retail Sales. The expected outcome for retail sales to advance 0.3% MoM and headline inflation to increase by 0.2% MoM and similar 0.2% increase in core prices would lead to an unchanged annual rate at 2.3% – not enough to materially impact the US dollar but nonetheless underpin a steady hand from the Fed. 

Rather, the attention for the week ahead will likely be with events across the pond in major European developments. Firstly, UK Voters will finally head to the polls, yet again. A relatively stable 10-point Conservative lead is expected to once and for all but the Brexit uncertainty to bed considering a stable Conservative majority should lead to a withdrawal deal between the UK and EU being implemented. However, anything fewer than 340 seats (out of 650) would point to continued instability in UK politics for 2020.as party hard-liners pull the government in opposite directions. Less than 312 Conservative seats risks a Labour-led government. 

"Should the Conservative party gain a majority (as the latest polls suggest), we expect GBP/USD to move into 1.34-35 area," analysts at ING Bank explained. "A large Conservative party majority is to have a more positive effect on GBP than a thin majority as the latter would raise concerns about the extension of the transition period beyond 2020 (which we see as necessary),"  Conversely, the analysts argued, a hung Parliament outcome would lead to a full pricing out of the GBP Brexit resolution premium, a re-building of sterling speculative shorts and GBP/USD likely dropping to the 1.28 level. "

Regarding the GBP reaction timeline, the first exit poll should be out at 10pm UK Time on Thu, with more clarity on the key battlefield seats to come early Friday morning (2-3am UK Time). In the face of the elections, all else gets pushed to the sidelines for the time being, including October Industrial and Manufacturing Production.

Christine Lagarde's first ECB will hopefully shed light on her preference on ECB's strategic review

Across the channel, a focus will be with the European Central Bank and Christine Lagarde's first a the helm. No change to policy is to be expected, with the eurozone's growth data having stabilised for now, especially with quantitative easing just being reintroduced this quarter. However, new ECB staff projections will be published with both CPI and growth projections for 2020 lowered (and 2022 projections newly revealed). Keenly, traders will be looking out for any clarity that might be taken from Lagarde’s preference on the ECB strategic review.