Expectations for an aggressive pace of hikes in 2019 have been dialled back significantly in the past few weeks following comments from Chair Jerome Powell. Speaking in late-November, Powell stated that the current policy rate of 2-2.25% was ‘just below’ the estimate of the neutral level of interest rates. This is a significant development that suggests that the Fed may be ready to pause their rate hike cycle or, at least, raise rates at a more gradual pace next year.

Following the above comments, we think that the ‘dot plot’ is almost certain to be revised lower tomorrow. We think that it may well show an average of just one hike in 2019 from the three pencilled in back in September.

Second referendum bets grow, more soft German data

Sterling spent much of yesterday trading in a holding pattern, with investors avoiding significant bets either way ahead of January’s rescheduled parliamentary Brexit vote.

Following the postponement of her original date, the new MP vote will now take place on the week of 14th January. Yet, with May so far unable to yield any concessions from the European Union, talk of a second referendum has been growing in the past few days. Betting markets are now placing around a 40% chance of another vote of EU membership being called.

Meanwhile, with activity relatively light on the ground in the Eurozone, the common currency has been driven largely by events elsewhere. We did, however, have some further evidence this morning that activity in Germany remains soft. This morning’s IFO sentiment indices all fell short of expectations, the headline business climate number falling to just 101.0 this month from the 102.0 recorded in November.